The Status of the Estate Tax as We Near the End of 2010

December 6, 2010 By Leave a Comment

It appears that the end of 2010 will also be the end of an era of no estate taxes.  On January 1, 2011, the estate tax rate is set to jump from zero to 55 percent on estates in excess of $1 million.  I’ve been watching this issue closely this year, hoping that Congress would act before January 1.  That’s still a possibility, but becoming less likely as political sparring over the Bush income tax cuts keeps the focus off of the reinstatement of the estate tax.

The Obama administration favors allowing the Bush income tax cuts to expire for high wage earners but extending the tax cuts for middle-income taxpayers; the Republican leaders insist that the tax cuts be preserved for all income brackets.  Senate Republicans were able to filibuster a Democrat-proposed middle class tax cut this weekend.  But as of this morning, Sen. Mitch McConnell (R-KY), the Republican leader in the U.S. Senate, is optimistic that a deal will be reached by year end to extend the Bush-era tax cuts for all income levels.

Meanwhile, the estate tax debate has been sidelined.  But it is still an important issue for Americans, according to a recent Gallup poll.  When the issue is discussed, most Congressmen take one of the following three positions:

  1. $3.5 Million Exemption; 45 Percent Top Tax Rate.  The Responsible Estate Tax Act, introduced by Senator Bernie Sanders (I-Vt.) back in June, is perhaps the best representation of this view.  This would put us back in about the same place that we were in 2009 (although Sanders’ Act does have a few changes, such as a billionaire surtax). Many Democrats, including Majority Leader Harry Reid, favor a $3.5 million exemption and a 45 percent rate.
  2. $5 Million Exemption; 35 Percent Top Tax Rate.  Senators Blanch Lincoln (D-Ark.) and Jon Kyl (R-Arz.) want to cap the top tax rate at 35 percent after a $5 million exemption.  The Lincoln-Kyl bill allows the estates of taxpayers who die in 2010 to choose between current law and their proposal.  Many Republicans, including Leader Mitch McConnell, and some conservative Democrats favor the Lincoln-Kyl proposal.
  3. Permanent Repeal.  As I’ve discussed recently, there has been a recent resurgence in the push for estate tax repeal.  Some Republicans are still pushing for permanent repeal, and anti-estate-tax group the American Family Business Institute has heralded a pro-repeal majority in Congress.

So the current estate tax situation is both promising and frustrating; promising because no one is happy with the $1 million exemption that will apply in 2011, but frustrating because Congress has not been able to agree on an alternative.

Filed Under: Estate Planning

Miami-Dade Probate Case: Florida Anti-Lapse Statute Will Not Save Bequest

December 6, 2010 By Leave a Comment

I wrote last week about the concept of lapse and how it applies to Florida estates.  A recent Miami-Date County probate dispute dealt with the application of the doctrine of lapse and the anti-lapse statute to the Last Will and Testament of a Hialeah resident.

Cecelia Lorenzo (Testator) died on October 20, 2008. Her Last Will and Testament left her entire estate to her brother and brother-in-law, as follows:

[T]o my brother, JOSE R. MEDINA, and to my brother in law, JESUS LORENZO, in equal shares.  If either of them do not survive me, the share of the deceased shall be given to their surviving spouse, JUANA R. MEDINA or MARIA LORENZO respectively.

The Testator’s brother (Jose) and his wife (Juana) each died before the Testator.  The Miami Dade County probate court had to decide who was entitled to the one-half share that the Testator intended to leave to Jose or Juana.  Not surprisingly, the brother-in-law (Jesus Lorenzo) argued that the bequest to both Jose and Juana had lapsed and, consequently, he should inherit the entire estate.

The children of Jose and Juana argued that the Florida anti-lapse statute should apply to give them a one-half interest in the property.  The Florida anti-lapse statute provides that, when a predeceased beneficiary is a descendant of the testator’s grandparents, the predeceased beneficiary’s share will pass to the predeceased beneficiary’s descendants instead of “lapsing” into the testator’s residuary estate.  The Miami-Dade County Circuit Court agreed that the anti-lapse statute applied and awarded half of the estate to the Medina children.  The brother-in-law appealed.

In Lorenzo v. Medina, 3D10-1243 (Fla. 3d DCA 2010), the 3rd District overturned the Miami-Dade County Circuit Court’s decision.  The Court noted that since the anti-lapse statue was a carve-out from well-established common law, it had to be interpreted narrowly.  With this as a starting point, the Court held that the anti-lapse statute did not apply to pass Jose and Juana’s estate to their children.  Instead, the brother-in-law got everything.

To understand how the Court reached this result, one must apply the lapse statute in logical priority.  The Testator’s will left everything to Jose, who predeceased the Testator.  Had this been all that the will had said, it is likely that the Medina children would have taken half the estate.  The anti-lapse statute would have applied to them since Jose was a descendant of the Testator’s grandparents.

But the Testator’s will specifically named Juana—who was not a descendant of the Testator’s grandparents—as an alternate residuary beneficiary.  This took the first lapse (of the bequest to Jose) out of the picture. What the Court was left with was a lapsed bequest to Juana, who was not within the purview of the anti-lapse statute since she was not a descendant of the Testator’s grandparents.  Since the anti-lapse statute did not apply, the one-half gift to Jose and Juana is instead distributed to the residuary beneficiary named in the will.  This means that the brother-in-law takes all.

Planning Tip: Although we can’t be sure from the public record, it does not look like this was what the Testator intended.  Rather, she probably intended to split her estate evenly between her brother’s side of the family and her brother-in-law’s side of the family.  But, as clients often do, she probably assumed that either Jose or Juana would survive her.  A better-drafted will could have provided for a fall-back category of beneficiaries instead of simply naming two individuals for each side of the family.  For example, the simple phrase “or, if she is deceased, to the descendants of Jose R. Medina, per stirpes” would have ensured that Jose and Juana’s one-half of the estate stayed within their family line.

Filed Under: Estate Planning

Estate Tax is Not a Theological Issue

November 22, 2010 By Leave a Comment

ABC News reporter Susanna Kim recently contrasted theological positions on the estate tax.  Her article highlights the views of two individuals, Jim Wallis and Gary Dawson, on the theological implications of the estate tax.

Before getting to the arguments, let’s get to know the two people Ms. Kim featured in the article.

  • Jim Wallis is the founder and editor of the progressive evangelical magazine Sojourners.  He has given the Democratic weekly radio address and been published in Time magazine.  He has served on the Advisory Council to President Barack Obama’s Office of Faith-Based and Neighborhood Partnerships and as a “spiritual adviser” to President Obama.  He’s the kind of guy that George Soros supports.
  • Gary Dawson is a coal miner from Wyoming.

Now that we know our contestants, let’s look at the positions.

Wallis supports a “vigorous” estate tax, which he believes is a matter of justice.  Wallis believes:

Inequality is a fundamental biblical concern. We have been increasing the gap between rich and poor for a long time. The only people affected by the estate tax are the super rich, and the super rich can afford to pay it. They owe it back to society and they should pay it.

And:

With the war going on, everyone has a responsibility to pitch in.  This is a way for people to contribute; to overcome tough issues in our society.

Now, I will grant Wallis his premise and pretend for a moment that the Scripture actually does teach that wealth should be distributed equally across society.  Does it follow that the government should compel redistribution of wealth?

Here’s Wallis’s basic argument:

  • Scripture is concerned with inequality.  Redistribution of wealth will result in less inequality.  Therefore the government should compel redistribution of wealth.

Let’s apply that same logic to other Scriptural concerns (and this time we will choose a few that are actually derived from Scripture and not superimposed on it by a liberal agenda).

  • Scripture is concerned with sexual purity.  Elimination of premarital sex would result in more sexual purity.  Therefore the government should prohibit premarital sex.
  • Scripture is concerned with devotion to the God revealed in Scripture.  Elimination of competing religious viewpoints would encourage worship of the God revealed in Scripture.  Therefore the government should prohibit the expression of other religious viewpoints.

Do you think Wallis would support those positions?

Of course, the rub here is between what a person should do as a matter of conscience before God (a spiritual/theological issue) and what the government tells a person that he must do in relation to society (a social/political issue).   This distinction is apparently lost on Wallis.  He uses a theological should to support a political must.  A person’s faith can teach him that he should do something without speaking to the issue of whether the government should compel it.

Wallis has no problem arguing for compulsory redistribution of wealth because it fits his liberal political views.  I don’t have a problem with this; it is what politics are all about.  My beef with him is for misusing theology to support his position.  (Ironically, Wallis uses the same sort of reasoning that the religious right puts forth to support its misguided attempts to legislate morality.)

Gary the coal miner, on the other hand, is against the estate tax.  According to the article, Gary isn’t in the highest tax bracket and works in a field where his peers average $70,000 to $80,000 per year.  One doesn’t get the impression that Gary should be concerned about estate taxes in his own estate.  But Gary recognizes the flaws in Wallis’ position.

Yes, we’re concerned about the poor, but we want to do it.  When the government forcibly takes your things, then that’s compulsory and no longer charity. It’s not something I’m doing because I love my neighbor and I love God. It’s because the government will throw me in jail if I don’t comply.

Good for you, Gary the coal miner, for recognizing that compulsory charity is not charity at all.

Filed Under: Estate Planning, Estate Tax Tagged With:

Dying to Save Estate Taxes (Literally)

November 1, 2010 By Leave a Comment

I try to go the extra mile to provide my clients with cutting edge strategies to save estate taxes.  But I haven’t recommended one planning strategy that will only be available for the next several weeks: Death.

Due to the 2010 Congressional snafu, there will be no tax on the estates of wealthy taxpayers who die prior to the reinstatement of the Federal estate tax on January 1, 2011.  The possibility of an tax-free estate is apparently enough to cause some wealthy taxpayers to take the ultimate estate tax savings measure and end their lives prior to 2011.

As reported in a recent Associated Press article, Representative Cynthia Lummis (R. Wyoming) says that may of Wyoming’s farmers and ranchers are so concerned with federal estate taxes that they plan to discontinue dialysis and other life-extending treatment so that they can die before year-end.  Lummis commented:

If you have spent your whole life building a ranch, and you wanted to pass your estate on to your children, and you were 88 years old and on dialysis, and the only thing that was keeping you alive was that dialysis, you might make that same decision.

Lummis didn’t identify her sources specifically, but claims that she heard of these decisions through the children of some of these wealthy (but suicidal) taxpayers.  Is this political posturing, or will we actually see end-of-life decisions influenced by tax planning over the next few months?  We’ll have to see where this one goes.

Filed Under: Estate Planning, Estate Tax Tagged With: ,

Estate Tax Repeal: Have Rumors of its Demise Been Greatly Exaggerated?

October 28, 2010 By Leave a Comment

It is well-known that the Federal estate tax is one of the most hated taxes in America.  I have spoken at a number of seminars on matters involving estate taxes, and nothing irks the average Joe like the thought that all of the possessions that they work hard for all their lives (and paid income taxes on) could be subject to confiscatory tax rates at death.  And fact that the average Joe isn’t subject to the estate tax doesn’t seem to curb the antipathy.  Americans simply hate the death tax.

If you have even a passing interest in taxes or estate planning and have been half-conscious this  year, you know that the Federal estate tax has been repealed for 2010 only and will come back in 2011 with an exemption amount of $1 million and estate tax rates of up to 55 percent.  Much of the discussion this year has centered on whether this will be a permanent situation or whether Congress will raise the exemption to a higher amount ($3.5 million and $5 million seem to be the most popular proposals).

But the past few months have seen a surge of discussion about permanent estate tax repeal, a proposition that is starting to gain traction.  The American Family Business Institute has published a petition for permanent repeal (with a bunch of good stuff about estate tax policy) as well as a Pledge for members of Congress to sign.  From my conversation yesterday with Palmer Shoening, a Tax Policy Analyst and Coalitions Manager for the AFBI, the Congressional Pledge now has 501 signatories, including:

  • 266 primary winners
  • 27 Senate Candidates
  • 239 House Candidates
  • 57 incumbents

Notwithstanding this recent surge, permanent estate tax repeal will continue to be an uphill battle.  And the push for full repeal is being met with the usual resistance.  For example, a recent article by the Wonk Room, published by the Center for American Progress Action Fund, challenges the premises behind the arguments for estate tax repeal, pointing out that only 0.6 percent of deaths in 2009 (when the Federal exemption amount was $3.5 million) were subject to the estate tax.  And since permanent estate tax repeal would cost an estimated $784 billion in taxes over the next 10 years, progressive and liberal policymakers argue that there is no sound reason to deviate from 2009 law.

Given that Congress was unable to permanently repeal the estate tax when Republican control was at a peak, I don’t think that full estate tax repeal is likely.  But even if the push for estate tax repeal is ultimately unsuccessful, it is still good news for upper middle-class taxpayers who are looking at a $1 million exemption in 2011 under current law.  As the Wall Street Journal recently reported, the renewed interest in estate tax repeal could pressure legislators to move toward a higher exemption.  This will provide much-needed relief for taxpayers with moderate estates.

So the good news is (a) that estate tax repeal debate is back on the radar and (b) neither side of the debate seems to be counting on the law remaining the same as it is scheduled to be reinstated in 2011.  Given that we are in a worst-case-scenario on January 1 of next year, either full repeal or a higher exemption would be an improvement.  But until Congress acts, taxpayers are well-advised to stick to sound but flexible estate planning techniques to minimize potential estate tax liability.

Filed Under: Estate Planning, Estate Tax Tagged With: ,

Janet Novack Discusses Proposal to Allow Prepayment of Estate Taxes

October 27, 2010 By Leave a Comment

On October 26, Janet Novack discussed an interesting proposal by Senate Finance Committee member Maria Cantwell (D-WA) to allow prepayment of future estate tax liability to the discount.  In Should Congress Let The Next Mark Zuckerberg Prepay His Estate Taxes?, Novack describes the proposal:

Taxpayers could prepay estate taxes on the assets in the trust at a discount and based on the assets’ market value when put in the trust. Essentially, they’d be able to freeze their estates for federal estate tax purposes—a long sought goal of estate planners.

Since this would pump up revenue into Federal coffers in the short term (does this sound like the tax version of “forever” stamps?), the Senate is apparently giving the idea some consideration.  But the proposal isn’t all good news.  Major drawbacks include:

  • Taxpayers who take advantage of the estate freeze would forfeit their exemption amount ($5 million if the Lincoln-Kyl proposal becomes law) and lose the basis step up on appreciated assets.  Like the 2010 estate tax dilemma, this would be an exchange of one tax benefit (estate tax relief) for another (erased appreciation in assets held until death).
  • Generation-skipping tax would still apply.  This means that assets left to recipients more than one generation below the grantor could be subject to taxation.
  • The prepayment trusts would be grantor trusts, meaning that the grantor retains full control and, during his or her lifetime, pays all of the income taxes of the trust.

Like most of the recent proposals, we’ll have to wait and see where this goes.  What do you think?  Is this a good idea?

Filed Under: Estate Planning, Estate Tax Tagged With: ,

IRS Releases Estate Tax Statistics for 2001-2009

October 27, 2010 By 1 Comment

I’ve been looking over the data from the IRS Estate Tax Statistics for decedents dying between 2001 and 2009.  The data was collected as part of the annual estate tax study.  A few interesting points about the 2009 statistics:

  • Due to the higher exemption amounts (which increased from $675,000 in 2001 to $3.5 million for 2009 – more on that here), the number estate tax tax returns decreased from over 108,000 in 2001 to under 34,000 in 2009.  In other words, only 34,000 of individuals who died in 2009 had taxable estates when the exemption amount was $3.5 million.  I would be curious to know what the number would drop to if the proposed $5 million exemption amount were enacted.
  • Those estates that were taxable in 2009 had over $194 billion in assets.  The primary assets were stock and real estate, coming in at 30 percent and 22 percent, respectively.  Cash (11%), bonds (13%), pensions and 401(k)s (7%), and miscellaneous other assets (17%) made up the rest.
  • Just under half of the decedents with taxable estates were married and another 38 percent were widowed.  And, not surprisingly, over 97 percent of those who were married claimed a marital deduction.  Only 10 percent of estates of married decedents owed estate tax.  This indicates that most of these folks had done at least some estate planning, and I suspect the majority of them had also used a credit shelter bequest.  This is a strong policy reason for making the unified credit portable (meaning that the second spouse to die could take advantage of any unused portion of the predeceased spouse’s unified credit).
  • Less than half of those filing owed estate taxes!  Again, this indicates that most folks with taxable estates are doing some sort of estate planning, including marital and charitable bequests to avoid taxes at the death of the first spouse.
  • Bad news for us guys.  Almost 58 percent of the decedents with taxable estates were males.  This, combined with the statistics indicating heavy use of the marital deduction, indicates that the men are dying first and leaving the estate to their wives, using the marital deduction to zero out the estate taxes at the first death.
  • Approximately 19 percent of the estates claimed a charitable deduction, for a total of $16 billion in charitable deductions claimed.  But the ultra-rich appear to be the ones making the biggest donations.  Over 58 percent of the donations were made by estates with $20 million or more in gross assets, notwithstanding that these estates represented only 3 percent of filers.

It will be interesting to see how these numbers influence the policy arguments over estate tax repeal or a permanent estate tax fix.

Filed Under: Estate Planning, Estate Tax Tagged With: ,

New Tax Rules for Executors in 2010

September 22, 2010 By Leave a Comment

I commented recently about the IRS’s new FAQs about the New Tax Rules for Executors for 2010 and how they provide an indicator about how the IRS views property held in revocable trusts for purpose of the 2010 basis rules.  I thought I’d follow up to summarize some of the other salient points of the FAQ.

Reporting. The IRS also clarifies (as if there were any doubt) that the estate and GST tax are fully repealed in 2010 but that the gift tax is still in effect.  Because there is no estate tax in 2010, taxpayers should not file a Form 706.  Those who do will have it returned.  But taxpayers must still file Form 709 for gifts made in 2010.  Executors are, of course, still required to file the final Form 1040 for the decedent and the Form 1041 for the estate.

The FAQ references the new tax return required to allocate the allowable basis adjustment under IRC § 1022 to property acquired from a decedent.  This return is required if the property’s value exceeds $1.3 million or if the decedent acquired the property by gift (except gifts from the surviving spouse) during the 3-year period ending on the date of the decedent’s death and the donor was otherwise required to file a return to report the gift.  The IRS is apparently still working on the form for these returns.  But they are due by April 15, 2011.

The executor must also provide a written statement of the information included on this special return to each recipient of property listed on the return.  The statement must be provided within 30 days after the filing of the return.

Assessing the Current Situation.  The FAQ states the obvious about 2011 law:  the estate tax repeal will end on January 1, 2011, and come back in with an exemption amount of $1 million; the GST tax will come back in at $1 million, indexed for inflation; and the maximum estate tax rate will be 55 percent.

The IRS assures taxpayers that they are closely monitoring the situation and will react quickly to any changes:

We are monitoring the current state of the estate, gift and GST tax law and proposed changes in Congress.   If legislation is enacted regarding the estate, gift and GST taxes, the IRS will act swiftly to assess the impact of such legislation and provide guidance to taxpayers regarding their tax obligations and filing requirements.

But in a few candid responses, the IRS admits that they are as in the dark as any of us regarding the future of the estate tax.  In response to questions about whether Congress would retroactively reinstate the estate tax for decedents dying in 2010 and whether Congress would change the exemption amount and rates for 2011, the IRS reply is “We do not know.”  It sounds like the IRS and estate planning attorneys are strange bedfellows for the time being.

Filed Under: Estate Planning, Estate Tax, General Probate Tagged With: , , , , ,

IRS Clarifies 2010 Basis Rules for Revocable Trusts

September 21, 2010 By Leave a Comment

New FAQs indicate that property held in a revocable trust should qualify for allocations of basis increase

The IRS has published a webpage on FAQs about the New Tax Rules for Executors for 2010 (Update: the original IRS webpage has been taken down; most of this information is now contained in Publication 559).  While most of these rules are not groundbreaking (Q: Is the estate tax repealed for decedents dying in 2010? A: Yes.), they do provide guidance about how the IRS will apply the 2010 basis rules to property held in revocable trusts.

The lapse of the estate tax for 2010 was accompanied by a new set of basis rules that replaced the taxpayer-friendly “stepped-up” basis rules with a modified carryover basis regime.  Generally, for the estates of decedents who die in 2010, the basis of assets acquired from the decedent is the lesser of the decedent’s adjusted basis (carryover basis) or the fair market value of the property on the date of the decedent’s death.

There are two “coupons” that taxpayers can apply to reduce the harsh consequences of the new carryover basis system.  First, the executor can allocate up to $1.3 million (increased by unused losses and loss carryovers) to increase the basis of assets left to anyone.  Second, the executor can allocate an additional $3 million to increase the basis of assets passing to a surviving spouse, either outright or in a Qualified Terminable Interest Property (“QTIP”) trust.

The 2010 basis rules, which are found in IRC § 1022, apply to property “treated as owned” by the decedent and “acquired from the decedent.”  There has been some discussion about whether property owned by a revocable trust would qualify.  Two views have emerged.  The more conservative view is that since IRC §  1022 deals with what is or isn’t owned by the decedent for purposes of basis allocation and does not mention revocable trusts, revocable trusts do not qualify for the basis increase.  In other words, because IRC § 1022 does not reference the grantor trust rules, property owned by a grantor trust is not “treated as owned” by the decedent and is therefore ineligible for basis increase.

The other view, which I hold, is that property owned by a grantor trust under the rules of IRC §§ 671-678 are treated as wholly-owned by the grantor and therefore should qualify for the basis increase based on the plain language of the rules themselves.  The IRS appears to agree, although with some timidity.  The FAQs state:

All of the decedent’s property was held by a revocable (or living) trust.  Can the basis of that property be increased as well?
Probably yes. The decedent is treated as owning property transferred by the decedent during life to a qualified revocable trust (as defined in section 645(b)(1)).

While this language falls short of binding guidance on the issue, it should give taxpayers some comfort that property held in a revocable trust will be eligible for basis step-up under IRC § 1022.

Filed Under: Estate Planning, Estate Tax, Trusts & Trustees Tagged With: , , ,

Asset Protection Attorney Publishes Charging Order Chart

September 20, 2010 By 1 Comment

Asset protection attorney Mark Merric has recently published an LLC charging order table that summarizes the laws of each state regarding charging order protection.  In light of the recent Olmstead decision holding that a charging order may not be the exclusive remedy for single-member LLCs, wealth advisers should review the chart to determine how the laws of their particular jurisdiction treat this topic.

The charging order table weights four key factors to evaluate each state’s charging order protection.  The factors are:

  1. Whether a creditor can petition a court for judicial dissolution of an LLC (only 5 states allow this: Hawaii, Illinois, Montana, South Carolina, and Vermont);
  2. Whether state law allows for the judicial foreclosure sale of the member’s interest (a disturbing number of states are silent on this issue);
  3. Whether state law allows or prohibits a judge from using a “broad charging order” to restrict an LLC from engaging in certain transactions, such as making distributions, loans, or capital acquisitions; and
  4. Whether state law permits or prevents equitable remedies (constructive trust, resulting trust, alter ego, reverse veil piercing) to reach the underlying assets of the LLC.

In Alabama, creditors may not petition the court for judicial dissolution.  A charging order is the sole remedy, and a judicial foreclosure sale of the member’s interest is precluded.  However, Alabama law is silent about whether a judge could use a “broad” charging order to restrict LLC activities, and it appears that equitable remedies could be used to reach the underlying assets of the LLC.

Mississippi law on charging order protection isn’t substantially different from Alabama.  Creditors cannot petition for dissolution, and equitable remedies may be available to reach the underlying assets of the LLC.  But Mississippi law is silent about whether a “broad” charging order would be available or whether a judicial foreclosure of a member’s interest could be an effective remedy.

As we recently indicated, Florida law on this issue may be in a state of flux.  In a divided opinion, the Florida Supreme Court held that charging orders are not an exclusive remedy for creditors of an LLC.  Some commentators have argued that the case was wrongly decided and that the dissent was correct.  In any event, it is possible if not likely that the Florida legislature will clarify this issue under Florida law.

Filed Under: Estate Planning Tagged With: , , ,
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