Here's the latest on the fight over the future of the estate tax tax, from Bloomberg.com. In general, Republicans and business lobbyists are pushing for a $5 million exemption and a 35% rate, while the Obama administration is counting on a $3.5 million exemption and a 45% rate. If nothing is done, 2011 will bring a $1 million exemption and a 55% rate.
Yes, I know this is the North Carolina Estate Planning Blog, but in these troubled economic times, with most states, including NC, desperate for cash, this could be a sign of things to come here and elsewhere.
Washington currently has a $2 million estate tax exemption, with rates ranging from 10% to 19%. A bill was introduced in the state legislature on February 13 to double the rates (20% to 28%).
North Carolina's estate tax is tied to the federal estate tax, so there is no tax this year. It will return next year, however, when the federal estate tax is back, with a scheduled $1 million exemption and 55% rate. North Carolina's top rate is 16%.
There is no estate tax in North Carolina this year, but residents (and owners of real estate) in 19 other states do have a state estate tax, even in the absence of the federal estate tax. Take a look at this article on Forbes.com, Where Not to Die In 2010.
The North Carolina estate tax will return next year when the federal estate tax is reinstated.
Nothing has been decided yet, but here's the scoop from TheHill.com as of February 9, 2010. At a minimum, the 2009 $3.5 million exemption and 45% rate would continue, effective January 1, 2010.
For years, there has only been North Carolina estate tax due if federal estate tax was due. Now, however, that the federal estate tax is gone (for now, anyway), what's the status of the NC estate tax?
N.C.G.S. Section 105-32.2 provides, in pertinent part, as follows:
"The amount of the estate tax imposed by this section is the amount of the state death tax credit that, as of December 31, 2001, would have been allowed under section 2011 of the Code against the federal taxable estate. The tax may not exceed the amount of federal estate tax due under the Code." [Emphasis added.]
Regardless of how the first sentence above is interpreted, since zero federal estate tax is due for individuals dying in 2010, the second sentence clearly mandates a zero NC estate tax as well.
From The New York Times to my bully pulpit:
This article helps explain why revising old estate plans is more important than ever, given this bizarre (tax-wise) year of 2010.
And for heaven's sake, if you don't have an estate plan, what are you waiting for? Today is the first day of the rest of your life, but tomorrow may be the last day of the life you had. Be a grownup and get a plan!
This is from Steve Akers' recent presentation, Estate Planning in Light of One-Year 'Repeal' of Estate and GST Tax in 2010:
"the Administration proposes to dramatically change the rules regarding valuation discounts (emphasis added). If there is an estate and gift tax reform package adopted next year, it could include that provision. If there is no legislation, there are indications that the IRS will issue regulations under §2704 that would place significant restrictions on valuation discounts on entities that are valued on the basis of their liquidation value (such as family limited partnerships holding marketable securities or other assets other than operating businesses.) Therefore, to have a chance to take advantage of the lower 35% rates in 2010 and to avoid the coming restrictions on valuation discounts, clients should consider make desired gifts and sales as early in the year as possible (Emphasis added).
Since the estate tax is sure to return, I am advising clients for whom a family limited liability company makes sense to form it now, and if possible use their $1 million lifetime gift tax exemption now to take advantage of discounting before it is legislated away.
I just put this Estate Planning Alert on my firm's website homepage, but thought it would also be appropriate for this blog:
As of January 1, 2010, there is no more federal estate tax. The estate tax has been replaced with a complex modified carryover basis regime. In 2011, the estate tax is scheduled to return, with a $1,000,000 exemption and 55% rate (plus an additional 16% for North Carolina residents). Due to these changing laws, it is imperative that everyone with an estate of $1 million or more do proper planning to ensure that income and estate taxes will be minimized. Be aware that the face value of life insurance is included in calculating one's estate, so even many young couples have estates in excess of $1 million. Do not let your family pay tax unnecessarily. Consult an estate planning specialist today.
From its inception, the 2001 tax act was scheduled to repeal the federal estate tax and generation skipping transfer tax (GSTT) for one year beginning January 1, 2010. This should come as no surprise. What is surprising, however, is the fact that the 2001 tax act has now played out and repeal, at least temporarily - and unless reinstated retroactively - is upon us. This post is from today's Advisor's Forum Wealth Counselor and explores how we got here (which may be instructive as to what will happen in the future) as well as some of the planning implications of no federal estate tax or GSTT for at least some part of 2010.
Continue Reading...It's 2010! As of January 1st, the federal estate tax is no more and it may mean that you should revise your estate plan and related documents. Anyone with total assets over $1 million (including face value of life insurance, retirement, home equity, etc.) should make make sure there estate plan is up to date. Click "Continue Reading" to find out what the change involves, what happens next year, and what steps you might want to take now to ensure your wishes are carried out.
Continue Reading...We only have a few hours left before the much reviled "death" tax disappears, to be replaced by a complicated and confusing carryover basis regime. So, if your estate is over $3.5 million, the tax impact may be less if you die tomorrow rather than today. Don't count on certain tax savings, however, as Congress could very well reinstate the estate tax retroactively to January 1, 2010. And if you wait until 2011 to die, your estate could be taxed even more, as the estate tax will return then, with a $1 million exemption and a 55% rate.
My advice - don't die, but see your estate attorney right away! Failure to plan for all these changing laws could end up being very costly.
Here's a recent article on the estate tax from the WSJ.com. Not exactly objective reporting, more like an opinion piece against the "death" tax.
The articles states that "the best strategic outcome now is to let the death tax expire in January as scheduled under current law, and return to this debate next year when the tax rate is zero. Then let liberal Democrats explain to voters on the eve of elections that they must restore one of the most despised of all taxes."
This is not exactly accurate in that while "restoration" of the estate tax for 2010 would require congressional action, without any action the exemption will be reduced to $1 million and the rate will increase to 55% in 2011. So if next year the Democrats propose imposing the current $3.5 million exemption and 45% rate on 2010 and future years, they will actually be proposing significant tax relief. That would get my vote.
Here are yesterday's and today's articles from the Wall Street Journal. While there is a brief discussion of the 2010 "Carryover" Basis rule that will apply instead of the estate tax, there is no mention of the fact that each estate will have $1.3 million in basis to apply to assets, with an extra $3 million for spouses. Even with these generous exemptions, it will be a record-keeping nightmare.
Other than perhaps a one year extension of current law, we are unlikely to see any movement on the estate tax in 2009. CCH Tax Newsletter.
The U.S. House of Representatives is scheduled to vote on the estate tax today, but even if legislation passes, Senate approval is necessary. Lots of politics involved for a tax that affects so few people. See what the Washington Post has to say.
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...
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.
Another article from CQ Politics about the Democrats' plan for the estate tax in 2010.
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.
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 article on Trusts & Estates journal's website discusses a very real possibility - a return in 2011 to the estate tax laws of 2001. Briefly, that would mean a $1 million exemption and a 55% rate.
On October 15, 2009, Rep. Schrader (D. Oregon) introduced "The Small Business and Family Farm Estate Tax Relief Act of 2009" ( H.R. 3841), which would "repeal carryover basis for decedents dying in 2009, and "increase the estate tax exemption to $5,000,000" and "reduce the maximum estate and gift tax rate to 45 percent" for decedents dying after December 31, 2009.
Trouble is, carryover basis is to apply to decedents dying in 2010, not 2009. Seems this bill needs to be amended to correct the description of what it would do.
Check out this aptly titled article on webcpa.com - The dangers of postponing estate planning until Congress clarifies the law. Don't let the expenditure of a few hours or a couple of thousand dollars keep you from putting a plan into place that could avoid unintended financial problems for your family and/or save them hundreds of thousands of dollars in taxes. Estate plans are not meant to be a "once and done" solution. Regular updates are necessary, just like tuneups for a car. Without regular maintenance, your car will eventually breakdown and be useless. The same could be said for an estate plan.
This article from WSJ online on the effect on changing estate tax exemptions on what's left for the surviving spouse describes just one reason why.
Here's a link to an article from Evan Cooper at Investment News about a recent webinar on the federal estate tax that the magazine hosted - geared for financial advisors but worthy reading for all those interested in what will happen with the estate tax. There were no definite conclusions by the panel, but most experts agree that estate taxes are likely to go up, rather than down.
One listener, J.B. Stroll, commented: "Having listened to the presentation, I thought a major take-away was that Congressman Rangel had intimated to a speaker that the proposal would be for a "patch" with the existing 2009 rules for one more year. There wasn't time for congress to deal with revamping of the estate taxes." (Emphasis added). This is consistent to what I have heard.
As an estate planning attorney, here's one recommendation from the article I certainly endorse: "When your clients have anything remotely related to estate planning to consider, find a competent estate-planning attorney with whom to work. This stuff is so complicated already — and likely to become even more complex — that your clients will thank you a million times over for helping them get their estate plans in order. A lifetime of hard work can disappear as a result of one tiny mistake, so be ultracareful."
In addition to providing ease of management and significant asset protection, FLPs and (FLLCs) are still a excellent planning tool for obtaining gift and estate tax discounts (for minority interests and lack of marketability) - provided that the implementation and valuation are done correctly. See this BVWire article on Keller v. U.S., 2009 WL 2601611 (S.D. Tex.) (Aug. 20, 2009).
However, anyone considering a FLP or FLLC for the transfer tax advantages should not delay - the Obama administration has recommended legislation prohibiting such discounts in most cases.
Jonathan Weisman of the Wall Street Journal reports that the Estate Tax Faces Its Own Life-and-Death Struggle. When and what will happen with regard to the federal estate tax is still very much up in the air.
Here's what's happened this decade:
Fellow Blawger Gideon Alper, who writes the Gay Couples Law Blog, has an interesting take on what will, or will not, happen with the federal estate tax over the next year or so: Estate Tax Repeal in 2010 Not a Big Deal Because Congress Can Pass a Retroactive Tax Amendment.
Regardless of what happens with the estate tax, the bottom line for those whose estates are $1 million or more, or are likely to be in the near future, is to be prepared, to the extent possible, by implementing a comprehensive, yet flexible, estate plan. And then - review it as the tax legislation does change.
Hurry up and wait is basically the message of this article from TheHill.com
TheHill.com is self-described as the publication “for and about Congress, breaking stories from Capitol Hill, K Street and the White House. The Hill stands alone in delivering solid, nonpartisan reporting on the inner workings of Congress and the nexus of politics and business.”
For those seeking some certainty in the tax laws to be able to do more effective planning, the situation on the Hill may seem more like the "Hell."
I, for one, am advising my clients not to count on a $3.5 million or more exemption in the future as a given. This goes for current planning and post-mortem planning, such as funding credit-shelter trusts by disclaimer after the death of the first spouse to die. Not that my clients always take my advice...I just make sure my file is documented so if the kids end up with large estate tax bill, I won't be the one to blame.
More news on the possible future of the federal estate tax from WSJ.com.
Based on inside sources in the U.S. Senate, here's a prediction about what will happen with the estate tax. Since health care reform has consumed Congress and the Obama administration (except for drinking beer with professors and policemen), there will likely be no action on the estate tax until late December. At that time, with a cash-hungry government facing a year with no estate tax whatsoever, Congress will institute a one-year patch extending the current $3.5 million exemption through 2010. Then, in 2011, the exemption will drop to $1 million (with no action from Congress necessary). This, in addition to the coming increases in income taxes, will help pay for health care reform and all the other hemorrhaging of taxpayers' money. Bad for taxpayers, but a boon for tax planning professionals. We'll see...
The U.S. Tax Court decision in Estate of Erma V. Jorgensen, T.C. Memo 2009-66, provides another example of the wrong way to create and administer a family limited partnership from an estate tax planning perspective. See this article by attorney Kay Ford Bailey of Austin, Texas for a brief analysis.
On April 22, 2009 Representative Jim McDermott of Washington has introduced H.R. 2023, which has been submitted to the Ways and Means Committee for study. The Sensible Estate Tax Act of 2009 would (1) allow an estate tax exclusion of $2 million adjusted for inflation in calendar years after 2010; (2) revise the estate tax rates for larger estates (45% up to $5 million, 50% from $5-10 million, and 55% above $10 million; inflation adjusted); (3) restore the estate tax credit for state estate, inheritance, legacy, or succession taxes; (4) restore the unified credit against the gift tax; and (5) allow a surviving spouse an increase in the unified estate tax credit by the amount of any unused credit of a deceased spouse.
I agree that this legislation is sensible from a fiscal standpoint, enabling the IRS to collect more revenue (than a $3.5 million or higher exemption would allow), while providing a healthy $4 million that married couples can pass on to children or others with no special planning. It will also help many states such as Florida that only can collect estate tax on a state level to the extent that the federal government provides a credit, rather than a deduction.
As for spousal portability, as I have said before, while on its face it appears to obviate the need for credit-shelter or bypass trusts, that's not necessarily the case. Even with portable exemptions, credit-shelter trusts will be important from an asset preservation standpoint, avoiding the possibility of taxation should the surviving spouse's estate exceed $4 million, and protection against future reductions in the estate tax exemption.
There's also the question of how the exemption amount available to the surviving spouse would be established. If a couple thinks there's a chance that the survivor's estate will exceed $4 million, would an estate return need to be filed at the first death, even it it's under $2 million? How else would any transfers to others than the spouse be documented?
In the recent case of Estate of Valeria M. Miller v. Commissioner; T.C. Memo. 2009-119; No. 5207-07 (27 May 2009), the U.S. Tax Court allowed a 35% discount for gifts of family limited partnership interests. No discount was permitted for the FLP interest owned by the decedent at her death.
This case shows that a properly planned and executed family limited partnership or limited liability company is still a very effective way to pass on wealth to younger generations. However, Obama's tax proposals would do away with such discounts in most cases.
Click here for a summary and the full text of the case, thanks to NC State's GiftLaw eNewsletter.
A while back I blogged about the advisability of trustees of irrevocable life insurance trusts (ILITs) reviewing the policy owned by the trust to help ensure the policy is still a sound investment and won't lapse. Here's an article from the Wall Street Journal website covering a related topic, Keep Tabs on Insurance that Covers Estate Taxes. The article doesn't discuss the use of ILITs to avoid estate taxes on the life insurance proceeds and further protect the funds for the beneficiaries, but in my opinion an ILIT should always be used for life insurance in a taxable estate (over $3.5 million in 2009). ILITs are the best (estate) tax shelters around! Even for relatively "small" $1,000,000 policy, a $2,500 trust could easily save over $500,000 in estate taxes.
President Obama's Green Book contains proposals for modifying the GRAT rules, eliminating valuation discounts for transfers of interest in many family limited partnerships and limited liability companies, and increasing income tax rates and limiting deductions for high income taxpayers.
Here's a nice outline prepared by Bob Keebler, CPA of Virchow Krause & Company, LLP in Wisconsin.
Continue Reading...There has been much recent discussion about "death" tax reform, and several bills have been introduced in Congress to that effect (as I have blogged about over the last few months), but so far the law as provided in the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRA) is still in effect.
EGTRA put into place the following estate tax "phase-out" schedule, which repeals the estate tax for a grand total of one year, and brings bring a $1 million exemption and 55% rate in 2011:
Continue Reading...The debate over extending the $3.5 million estate tax exemption versus increasing the exemption to $5 million is discussed in this NY Times article. Don't our legislators have better things to do than argue over reducing taxes for such a minute percentage of the U.S. population?
Those with estates over $3.5 million simply need to avail themselves of the services of a qualified estate planning attorney to implement measures to reduce or eliminate estate taxes.
U.S. Senate goes two ways on estate taxes.
The U.S. Senate went two different ways on the estate tax, which has been a contentious issue for years — a tax congressional Republicans have villified as the “death tax”.
Senators voted 51-48 to include a provision in the fiscal 2010 budget that called for exempting estates at $5 million for individuals and limiting the tax to 35 percent — though the measure is non-binding and could be stripped out when the legislation is melded with a separate budget that passed the House of Representatives.
The amendment provoked a moment of drama in an otherwise long day of voting in the Senate where Democratic leaders scrambled to find the votes to kill the amendment, which scores some political points to those who have rallied against the estate tax for years.
The amendment was backed by several Democrats, including a couple senators facing tough re-election bids next year, Senators Blanche Lincoln of Arkansas and Patty Murray of Washington.
The New York Times was so incensed by the amendment it wrote the following in its lead editorial on Thursday:
“The proverbial millionaires next door — the plumbers, contra ctors and accountants who amass substantial wealth through hard work and modest living — are not the intended beneficiaries of the proposed cut. The Obama budget already takes care of them, because it retains today’s law, which imposes the estate tax only on couples with property worth more than $7 million, or individuals with property worth more than $3.5 million. That means 99.8 percent of estates will never — ever — pay a penny of estate tax.”
Senate Minority Leader Mitch McConnell argued that “No one should have to be taxed on their assets twice, and no one should have to visit the taxman and the undertaker on the same day. But if we can’t repeal this tax, then we should at least lower it at a time when Americans are already burdened by shrinking retirement savings.”
President had proposed in his budget plan keeping the estate tax exemption at its current level of $3.5 million and tax the rest at 45 percent.
But minutes later the Senate adopted a second amendment that would require a 60-vote threshold to change the estate tax rate and exemption beyond the current levels unless commensurate tax relief was offered those who earn less than $100,000 annually.
Since Republicans now have only 42 seats in the Senate, and 10 Democrats supported the earlier amendment, reaching 60 votes likely would be tough.
In any event, since the amendments are part of the non-binding budget resolution, the votes are really just symbolic.
Click "Continue Reading" to view the statements of Senator Max Baucus (D-MT) (chairman of the Senate Finance Committee) made on the floor of the Senate last week. He opposed an amendment proposed by Senator John Thune (R-SD) to President Obama’s budget. Obama proposes limiting deductibility for charitable gifts for high income taxpayers to a 28%. Senator Thune’s amendment would have eliminated this deductibility cap. The amendment failed - 48 for and 49 against.
Continue Reading...From the GiftLaw eNewsletter:
Senate Finance Committee Chair Max Baucus (D-MT) introduced the Taxpayer Certainty and Relief Act of 2009 on March 26, 2009. The tax bill includes a $2.3 trillion middle class tax cut package and also creates a freeze on estate tax rates and major estate planning modifications.
Sen. Baucus indicated, "By guaranteeing a little extra cash in the pocket of working moms and dads and by making sure that the AMT and the estate tax can move with the economy, we avoid sweeping tax increases for millions of American families."
The bill would make permanent many of the provisions enacted for tax relief during the past decade. Several of the provisions are intended to reduce income taxes for low and middle income taxpayers. The bill would not change the scheduled increase in the top two tax brackets in 2011 to 36% and 39.6%.
The middle class reductions:
1. For taxpayers in the 10%, 15%, 25% and 28% brackets, the rates are continued.
2. The alternative minimum tax exemption is indexed for inflation.
3. The zero percent long-term capital gain rate for taxpayers in the 10% and 15% bracket is continued.
4. The child tax credit is refundable for incomes below $3,000.
5. The marriage penalty relief for taxpayers in the 15% bracket is continued.
6. The adoption and exclusion caps of $10,000 per eligible child are continued.
Sen. Baucus proposes significant changes in estate taxes. Rather than repealing the estate tax in 2010, the exemption is frozen at $3.5 million per person ($7 million per couple), with the estate tax rate set at 45%. The exemption would be increased for inflation in $10,000 increments starting in 2011.
Farmers and ranchers would benefit from an increase in the special use valuation from $750,000 to $3.5 million. This would permit transfer of very valuable farms and ranches from parents to children who are actually operating the farm or ranch.
A change that will require modifications to most large estate plans is the proposal to pass "marital deduction portability." If a surviving spouse passes away with an estate larger than the applicable exemption, he or she will be able to use the "aggregate deceased spousal unused exclusion amount."
In order to use a portion of the first decedent spouse's exclusion, his or her executor must make an election on that estate tax return. If the "Spousal Unused Exclusion" election is made, the surviving spouse may then use the remaining unused exemption.
If this bill becomes law, the full estate could be transferred to surviving spouse and he or she will have an estate exemption of $7 million.
Note: If this bill becomes law, the first tendency of many couples with taxable estates will be to revise their wills or trusts to do away with the credit-shelter (bypass) trusts. However, there will still be compelling reasons to have such trusts. With a credit-shelter trust, growth in the value of the assets is also protected from estate taxes, while that is not necessarily true if a couple relies on exemption portability. In addition, the credit shelter (or marital) trust provides valuable protection from mismanagement, creditors, and future spouses.
While only about .05% of estates will be subject to federal estate tax with the current $3.5 million exemption, this article, which originally ran in Trusts and Estates magazine, says to expect an audit in virtually all taxable estates.
The U.S. Tax Court issued an opinion on January 29, 2009 in the Estate of Marjorie deGreeff Litchfield v. Commissioner (T.C. Memo. 2009-21). The case involved the determination of appropriate (estate tax) discounts for built-in capital gains tax liabilities, and lack of control and lack of marketability for minority interests in two closely held family corporations, including one that had recently converted to a subchapter S corporation. The court allowed a discount of 91% for the built-in capital gains tax for the C corporation, and 52% for the S corporation. The minority interest (lack of control) discount was determined to be 14.8% for the C corporation and 11.9% for the S corporation. The lack of marketability discounts were established at 25% and 20%, respectively, for the two entities. The FMV Valuation Alert offers a nice summary.
This case involved farmland and marketable securities. Discounts for transfers of entities owning marketable securities and cash will be history if HR 436, the Certain Estate Tax Relief Act of 2009, passes.
The estate tax exemption is up (to $3.5 million) and portfolios are down. However, for those whose estates are still above $3,500,000, now is the perfect time to transfer wealth to younger generations. Interest rates are low, and the tax laws may never be more favorable. See Tough Times Are Good Times to Trim Estates on the WSJ website.
There's a couple of good recent articles on forbes.com - Dems Dedicated to Death Tax and Why You Need a Will. For this year, anyway, the $3.5 million exemption means that many of us don't need planning for estate tax purposes, but we need planning nonetheless.
1. H.R.96 : To amend the Internal Revenue Code of 1986 to increase the maximum reduction in estate tax value for farmland and other special use property, to restore and increase the estate tax deduction for family-owned business interests, and for other purposes.
Sponsor: Rep Conaway, K. Michael [TX-11] (introduced 1/6/2009) Cosponsors (None) Latest Major Action: 1/6/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
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2. H.R.173 : To amend the Internal Revenue Code of 1986 to exempt certain farmland from the estate tax.
Sponsor: Rep Salazar, John T. [CO-3] (introduced 1/6/2009) Cosponsors (7)
Latest Major Action: 1/6/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
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3. H.R.436 : To amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption, and for other purposes.
Sponsor: Rep Pomeroy, Earl [ND] (introduced 1/9/2009) Cosponsors (None)
Latest Major Action: 1/9/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
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4. H.R.533 : To make full estate tax repeal, small business expensing, and SECA tax deduction for health insurance permanent.
Sponsor: Rep Neugebauer, Randy [TX-19] (introduced 1/14/2009) Cosponsors (None) Latest Major Action: 1/14/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
A bill entitled the Certain Estate Tax Relief Act of 2009 was recently introduced in the U.S. House of Representatives. The bill retains the current $3.5 million federal estate tax exemption, freezes the estate tax rate at 45%, and repeals the carryover basis rules which would otherwise be in place next year. The effective date would be January 1, 2010.
The bill also contains a provision disallowing valuation discounts for transfers for interests in entities (such as LLCs and corporations) containing "nonbusiness assets." This is aimed at preventing the use of family limited partnerships and limited liability companies (which are not true operating businesses - holding marketable securities, for example) for discounted transfers to younger family members. This would eliminate a common and highly effective method for gift and estate tax reduction, but LLCs would continue to be an excellent tool for asset protection. The effective date of this portion of the Act would be the date of enactment.
Click "Continue Reading" for the text of the bill.
Continue Reading...Today's Wall Street Journal has an article on the latest buzz on what the Democrats would like to do with the federal estate tax. This summary is courtesy of Stephen Bigge, CPA:
Tired of all the taxes here in the good ole USA and thinking of moving to a tropical isle with little or no taxation? Besides the emotional and security issues, there tax penalties for leaving the U.S. In addition to providing tax relief to military personnel and veterans, the Heroes Earnings Assistance and Relief Act (HEART Act) of 2008 also contains a couple of provisions regarding expatriate taxation. Those who renounce their U.S. citizens in an attempt to save on taxes face the following:
What is an LLC?
In 1977 Wyoming was the first state to enact laws permitting the creation of a Limited Liability Company. An LLC combines the best features of a corporation with the best features of a partnership. Among other things, an LLC has the limited liability of a corporation and the ease of management and flow-through income tax treatment of a partnership.
In 2000, Wyoming again led the nation by enacting its Close LLC statute. This type of LLC is designed specifically for a small closely held family business. Family assets (such as stocks, bonds, farms, ranches, rental property, CDs and family businesses) can be managed under the protective umbrella of a Wyoming Close LLC.
Continue Reading...Here's a recent comprehensive report from the Urban-Brookings Tax Policy Center entitled Back from the Grave: Revenue and Distributional Effects of Reforming the Federal Estate Tax. An outline of the presidential candidates' and other recent proposals for reform is contained in Table 11 on page 20.
I'm back from vacation, furiously trying to catch up on things (as if!), but thought I would quickly add this tidbit from the NC Department of Revenue. It only applies to returns of NC residents who owned real estate in one or more other states, and generally results in a reduced amount of tax.
The change became effective July 16, 2008, but amended returns can be filed for any returns for which the time to claim a refund had not expired as of December 31, 2007.
Continue Reading...When doing estate planning, one needs to consider to whom to leave one's property, which is usually not much of a problem. Next, one must decide who will be in charge of the administration the Will - the executor . This choice is sometimes more difficult, but even without suitable family or friends, a professional or corporate fiduciary can be named. Once these decisions are made, the very simplest of wills can be created.
However, a simple will does not address three very important estate planning considerations dealing with protecting assets and family members:
As you can see, it pays to look beyond the basics when developing an estate plan.
As a proponent of Family Limited Liability Companies (LLCs) for asset management, creditor protection, and ease of gifting, I was pleased to read about the U.S. Tax Court's decision in Mirowski v. Commissioner, T.C. Memo 2008-74. March 26, 2008.
Mrs. Mirowski, widow of the inventor of the heart defibrillator implant, created a trust for each of her three daughters in 1992, which were funded with portions of her interests in the patent licenses. Then, in 2001, she formed a single member LLC, transferring substantial assets to it. Shortly thereafter, Mrs. Mirowski gifted a 16% interest in the LLC to each of the trusts. A mere four days later, she died unexpectedly.
The IRS argued under Section 2036(a) of the Internal Revenue Code that Mrs. Mirowski retained the right to income or enjoyment of the gifted property, so that it was included in her taxable estate. The estate maintained that the Section 2038 "bona fide sale" exception applied, so that the transferred assets were not subject to estate tax.
The Tax Court agreed, holding that the LLC's activities do not have to be equivalent to those of a "business" for the bona fide sale exception to be applicable. The Court stated that Mrs. Mirowski had "legitimate and significant non-tax reasons" for establishing and funding the LLC, including 1) joint management of family assets, 2) combining family assets to maximize investment opportunities, and 3) enabling equal transfers to her daughters.
Some key points for Family LLCs to hold up for gift and estate tax purposes:
The bottom line is that Family LLCs remain a viable and attractive option for transfers of family wealth, while also providing asset protection and management advantages. Just make sure you use an attorney experienced in forming Family LLCs to assist you, and carefully follow all of his or her instructions.
Yesterday a public hearing on possible gift and estate tax reform was scheduled before the Senate Finance Committee. Click "Continue Reading" for the full text of the report by the staff of the Joint Committee on Taxation. I could not get the proper formatting to reproduce, so it's a bit difficult to read.
Of primary concern are potential limitations on Dynasty Trusts, discounts for Gifts of Interests in Family Limited Partnerships (and LLCs), and use of Crummy Withdrawal Powers in trusts (which allow use of the $12,000 annual gift tax exclusion for transfers to trusts).
Items for Immediate Consideration:
By the way, the report references the "$11,000" annual gift tax exclusion, which is an error. The exclusion was increased to $12,000 last year.
As reported in the TaxProf Blog, Citizens for Tax Justice has released a state-by-state ranking of the number of estates owing federal estate tax in 2006. North Carolina ranked 13th, with 523 estates paying estate tax that year. Not exactly a large number! The estate tax exemption in 2006 was $2 million, as it is this year, so only estates valued over that amount owed tax. Assets passing to a surviving spouse or charity are tax-free regardless of the amount.
With proper planning, married couples can pass on up to $4 million to their heirs without tax.
From this article in the New York Times yesterday:
Beginning next year, the federal estate tax exemption will increase to $3.5 million. This means that the tax would apply to only about 0.3 percent of people who die each year. Not exactly the average American.
However, as part of the 2009 budget resolution, Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee, has proposed to keep the tax at those levels, with annual adjustments for inflation. The proposal is expected to pass.
Under current law, the estate tax will be eliminated in 2010 for that year only. In 2011 the exemption would drop down to $1 million. Republican senators,, however, feel that Baucus’s proposal is not sufficient. After it passes, Senator Jon Kyl, Republican of Arizona, is expected to propose further cutting the estate taxes.
The government would have to borrow to make up for the $200 billion tax loss, worsening the deficit and adding about $100 billion in interest to the nation’s tab.
The Kyl proposal needs a simple majority to pass. So if every Republican votes yes, just one Democrat would have to join them for the proposal to pass.
I personally feel that a $3.5 million exemption is quite generous, particularly given that married couples who do proper estate planning can pass double that amount to their heirs. If persons with estates over the exemption amount don't want to pay taxes, a good estate planning attorney can certainly help!
This week I'm in Orlando at the University of Miami School of Law's Heckerling Estate Planning Institute. Yesterday there was a discussion of what may be coming down the pike as to the federal estate tax (death tax):
Date of New Legislation: It's unlikely there will be any action until after the November 2008 election. There are 35 seats open in the Senate, 23 of which are currently occupied by Republicans. The democrats will probably end up with the majority. In any event, we will probably see no movement until 2009.
Chance of Outright Repeal: No way, even if the Republicans are in charge.
Exemption Amount: The current amount exempt from federal estate taxes is $2 million, and it is scheduled to rise to $3.5 million in 2009. With a Democrat in the White house and a Democrat controlled Senate, the exemption would probably stay at $3.5 million for a number of years. If the Republicans are in control, the exemption will most likely be increased to $5 million. Any increases in the exemption as part of the 2009 legislation over $3.5 million per person would not be available in that year, but would instead be phased in over several years. The phase-in could be similar to what was proposed in HR 5970 in July 2006.
Rate: We will probably see the top rate decrease from the current 45% to 35%, although very large estates may face a higher rate.
"Portability" of Exemption Between Spouses: Very likely that the new legislation would provide that the surviving spouse could utilize both exemptions, in a manner similar to that proposed in HR 5970 and HR 5638.
The IRS recently announced that the total number of estate tax returns filed fell by 58 percent to about 45,000 in 2005 from about 108,000 in 2001. The total amount of assets represented by these returns also fell, although by a lesser percentage. The total gross estate (assets) on these returns fell by 14 percent to $185 billion in 2005 from $216 billion in 2001. Net estate taxes reported on these returns declined by even less, only 8 percent. Click here for the IRS Estate Tax Facts.
With the estate tax exemption now at $2 million, I am doing fewer estate tax returns as part of my estate administration practice. Since, strangely enough, I enjoy preparing tax returns, that's disappointing. Death may be certain, and taxes may be certain, but death taxes are becoming a relative rarity.
Having just ridden a motorcycle through the endless farms of Iowa on my way to and from Sturgis, South Dakota, this news item caught my attention. Last month a bill was introduced to defer federal estate taxes on family farms as long as the land is used for farming or conservation purposes. See this article on the Save the Family Farm and Ranch Act of 2007.
While proper estate planning, including the use of life insurance trusts and family limited liability companies, could avoid much of the impact of estate taxes on family farms, I think this bill is a good move to help protect our nation's farmers and their contributions to our food supply.
A recent U.S. Tax Court case held executors liable for the penalty for the late filing estate tax return despite their attempt to blame their lawyer for the untimely return. Decedent, a U.S. citizen domiciled in Germany, died on September 10, 1999. She had two wills - U.S. and German. Two individuals, Roisen and Helman, were nominated as executors. They hired an attorney, who sought an extension of time for filing the estate tax return. The return was eventually filed on September 19, 2001, although the last date is could be timely filed was December 10, 2000. The IRS imposed a $233,359 penalty for late filing the return. The surviving executor argued the penalty should not be imposed because the return was late filed as a result of reasonable cause, not willful neglect. He argued that his attorney failed to advise him the return was due. The court found that the executor’s expectation that an attorney will file a return does not relieve the executor from his statutory duty to timely file the return. An executor might be excused if he reasonably relied on incorrect advice, such as no return was required, but here there was no evidence the executors even knew the filing deadline had passed, much less any evidence that they received errant advice.
Estate of Zlotowski v. Commissioner, T.C. Memo 2007-203 (July 24, 2007)
Lesson learned: You can't always blame the lawyer! Executors need to keep themselves informed about estate matters, including tax and other deadlines.
North Carolina is not known for its attractive estate planning and asset protection laws, but NC residents can avail themselves of certain out-of-state planning strategies that can provide significant estate tax savings and creditor protection. One state that has some of the most favorable laws is Nevada.
As a write this, I'm sitting in a hotel room in Las Vegas, having just finished up a meeting with nationally known estate planning and asset protection attorney Steve Oshins, whose office is located here. Mr. Oshins, who is published frequently in Trust & Estates magazine and Estate Planning magazine, has developed several innovative trusts and trust-related strategies, such as the Megatrust, the Inheritors Trust and the Opportunity Shifting Trust.
I have joined Mr. Oshins' Advanced Planning Legal Network to be able to bring these same types of techniques to my clients.
Click "Continue Reading" for a brief description of the advantages of using Nevada laws for estate planning.
Continue Reading...Yesterday the U.S. Senate approved an amendment to the Budget Resolution that would extend the 2009 estate tax rate (45%) and exemption ($3.5 million) through 2012. Under current law the estate tax would be "repealed" in 2010, but would return in 2011 with an exemption of only $1 million.
Click "Continue Reading" to view a report from Marshall Jones of West Palm Beach.
Continue Reading...An article in the February 24-25 issue of The Wall Street Journal describes how 529 College Savings plans can be used to reduce estate taxes. Earnings on the funds invested in such plans are tax-free if used for qualified college educational expenses. North Carolina residents also get a small tax deduction for contributions to North Carolina sponsored plans (Click "Continue Reading" for more information).
The plans allow the owner to maintain control over how the funds are used, and even change the beneficiary to another relative or the owner himself. If the funds are not used for educational expenses, taxes are due on the gains, along with a 10% penalty.
Gift tax rules allow using up to five years of the $12,000 annual gift tax exclusion at once, so that one person can put $60,000 into a plan in one year. For wealthy grandparents with multiple granchildren, this can add up to substantial estate tax savings. The current estate tax exemption is $2 million, so persons with estates over this amount may want to consider this technique. Before establishing the accounts, however, be sure to check with a qualified tax and investment advisor. There are fees associated with 529 Plans, and investment performance in many types of plans have been lackluster of the last several years.
Check out www.savingforcollege.com for a plethora of information on 529 Plans.
Continue Reading...Jeffrey Pennell, a professor at Emory Law School, was one of the featured speakers today at the Mid-South Forum ( meeting of estate planning attorneys) in Atlanta. In January I reported on his comments on the future of the estate tax at the Heckerling Estate Planning Institute in Orlando.
Professor Pennell believes that Congress will not act until late in 2009, and then will extend the $3.5 million estate tax exemption and reduce the rate to about 35%. He pointed out that for the country's extremely wealthy families - the ones that can influence Congress - the rate is much more important than a difference of a million dollars or two in the exemption amount.
An article by Robert Frank in yesterday's Wall Street Journal describes the recent dramatic drop in taxable estate tax returns. The rising estate tax exemption (currently $2 million), decreases in the tax rate, effective tax planning, increasing charitable giving by the super-wealthy and the advent of young dot.com millionaires all seem to be contributing to the reduction in returns and revenues.
In 2005 only 18,431 taxable estate tax returns were filed, one-third less than the year before, despite the fact that the number of millionaire households in the U.S. has increased more than twofold between 1995 and 2004.
The following news is from Stephanie Heilborn of the Milbank, Tweed law firm in New York City:
Russ Sullivan, Democratic Staff Director of the Senate Finance Committee, spoke at the joint meeting of the Estate & Gift Tax Committee and Trusts, Estates & Surrogate's Courts Committee of the NYC Bar Association last night. He provided some good insight into the current thinking on estate & gift tax reform.
Congress expects to address the estate tax in the second half of 2007. The bottom line is that for any bill to pass both houses, it cannot reduce the revenues raised by estate/gift tax by more than 50% (apparently the reason last year's proposal didn't pass is that it cost just a little too much (it reduced revenues by 60%) for some key Democratic senators to support it). Any new estate tax law is highly likely to contain the following provisions:
Step-up in basis (the feedback regarding carryover basis has been loudly and uniformly negative)
Estate tax exemption between $3.5 million and $5 million
Estate tax rate will correspond to the capital gains rate--possibly 15% rate for the first $5-10 million and a higher rate, which "will start with a 3", for the balance over that
Exemptions will be transferable between spouses
No state tax deduction (Apparently the state governors have been terrible lobbiers--not a single one has complained about the loss of state estate tax revenues.)
There will be "offsets" in exchange for the reduction in tax rates. These are likely to include restrictions on discounts available for family limited partnerships, especially those funded with mostly marketable securities. He told us, "Take a good look at some of the proposals from during the Clinton administration."
Unclear whether the estate and gift tax will be reunified--there has been disagreement within the Senate Finance Committee staffs
If we get to 2010 and no estate tax bill has been passed, they will extend the 2009 provisions for a while--even the more progressive Democrats agree that we can't go back to the pre-2001 law.
Finally, they do expect to issue technical corrections to the Pension Protection Act of 2006 sometime next year.
This is good news for most, but any new limitations on discounts available for family limited partnerships and limited liability companies could restrict planning for some wealthier taxpayers.
From EstatePlanningLawFirms.com on November 6, 2006:
Washington D.C. – Congressman Ted Poe (TX-02) announced that the House of Representatives passed H.R. 5638, the Permanent Estate Tax Relief Act of 2006. This bill will make certain provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) permanent. Without the passage of H.R. 5638, the estate tax repeal and all other provisions of EGTRRA would sunset on December 31, 2010. This would cause taxes placed on estates to revert back to their previous rates which were significantly higher. The current lower tax rate allows citizens who die to leave more to their beneficiaries, and less to the government. This is important to family owned businesses of all sizes, many were forced to sell their business because they couldn’t pay the taxes when the owner died.
“The old saying goes that the only two certainties in life are death and taxes. Under an estate or death tax, small farmers and family minded individuals who saved their whole lives to leave something to their children have to pay taxes, die, and then pay taxes again. It is unconscionable that the government punishes people by taxing them in life and in death. I urge the Senate to pass this bill quickly so that President Bush can sign it in to law,” Poe said.
Important Provisions of H.R. 5638:
1-Reunifies the estate, gift and generation-skipping transfer taxes - giving individuals greater flexibility to make estate planning decisions during life.2-Increases the exemption amount to $5 million per person effective January 1, 2010.
3-Reduces the rate of tax on estates up to $25 million to the capital gains tax rate (15 percent).
4-Reduces the rate of tax on estates of $25 million or more to twice the capital gains rate (currently 30 percent).
5-Simplifies estate tax planning by allowing married couples to take full advantage of the $5 million exemption by carrying over any unused exemption to the surviving spouse.
Due to #5, advance estate tax planning would not be as important, and would obviate the need for credit-shelter (bypass) trusts in many cases. Effectively, only couples with a net worth in excess of of $10 million would need to worry about estate taxes.
Since the Senate appears to be Democrat-controlled now, the chances of this bill passing is somewhat less now that than before the election. Prior estate tax relief has passed in the House, only to fail in the Senate.
When the Estate Tax is repealed (albiet for one year) in 2010, some heirs will face capital gains tax instead, with complicated and burdensome record keeping necessary. Check out this article at Bankrate.com, from which the chart below was taken...
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From EstatePlanningLawFirms.com:
WASHINGTON - United States Senator Mary Landrieu, D-La., announced that she is introducing a bill to bring relief and reform to the federal estate tax system. Under Sen. Landrieu's proposal, 99.99 percent of Louisiana residents would no longer be subject to any federal estate tax whatsoever and there would be a rate cut for those who would still have a tax liability.
"This is a plan that has a chance to pass Congress," said Sen. Landrieu, who added that she hopes the plan will serve as the blueprint for future Congressional debate and compromise on the issue.
"Unlike the current law, my plan is clear, simple and fair," she said. "It gives most opponents of the estate tax what they want: a significant tax cut. It gives most reformers what they want: a stable and predictable system that enables long-term estate planning. It gives most small business people and farmers what they want: a chance to keep what they have built up in their families over a lifetime of hard work. And it does all of this in a way that is fiscally responsible."
"How can people do wise and informed estate planning under the current system, which is unstable, uncertain and unfair?" Sen. Landrieu asked. "We need certainty. We need reform. And we need relief. I think my proposal lays a clear, balanced path to each."
Under Sen. Landrieu's Estate Tax Relief and Reform Act of 2006, the federal estate tax exemption level would be set at $5 million per person and $10 million per couple. The current exemption is $2 million per person but falls to $1 million in 2011.
"By dramatically raising the exemption, we will effectively get most people of Louisiana out of the tax altogether and forever," Sen. Landrieu said. "This is especially beneficial for many small business owners and family farmers."
The current estate tax only applies to about two percent of estates nationwide, so the "relief" only helps a very small percentage of the population. With the Democrats likely to regain control of Congress, I don't think Senator Landrieu can count on her proposal passing. It's ironic that she feels the citizens of her state should be freed from the burden of the estate tax after she requested $250 billion in Hurricane Katrina relief last year.
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