Recently in Estate Tax Category

June 3, 2011

Surgery and Procrastination

surgery.jpgSo, I have a weird job in that I, literally, talk to people about getting their estate plans up to date many times a week. And I've done this for TEN YEARS. Over and over, people tell me that they've been procrastinating and feel badly that they haven't gotten things taken care of. And I listen. In fact, my first question is almost always what prompted my clients to finally make the appointment and get the job done. It's almost always one of these four things:

  • An upcoming trip.
  • A scary diagnosis or test.
  • A death in the family or a death of a friend.
  • The birth of a child.

Let's face it, these are the things that get our attention in a deep way. They make mortality real and make us want to do what we can to get things in order. Until something like this grabs us, there are always 200 other 'important' things to capture our time and energy.

And here's my confession: despite my professional focus on estate planning, my family's estate plan has been out of date for at least four years! Really. Our guardian got divorced; her kids grew up to not get along with mine; our financial situation changed drastically. Every single thing about the plan wouldn't work.

And guess what? Do you know what made me fix it? It certainly wasn't because I knew we should. It was reasons one and two on the above list. Not only had we planned our first family trip that required airplane travel to a distant and slightly tropical local, but the week we got back my husband faced major spine surgery. Nothing like filling out hospital admittance papers to get those mortality juices flowing.

So, we redid our plan. We changed our guardians. We simplified our trust for tax planning. We updated our Durable Powers of Attorney and our Advance Health Care Directives. And it felt GREAT to finally fix it. Next up: the earthquake kit, also woefully out of date.

Believe me, I get it if you can't focus on estate planning right this second. But, please, next time life reaches out and grabs your attention, jump on it. You'll feel better, I can almost promise.

May 29, 2011

Joint Accounts and the Estate Tax

tax man.jpgDear Liza: If I have all of my $ assets (savings accounts, money market s, IRA' stock)) in joint accounts with my children, (excluding real estate) will these funds be exempt from any inheritance taxes upon my demise? Nope. Your children will inherit those assets from you as the surviving joint tenants, without having to go through probate. But all of the value of each asset will be in your taxable estate for estate tax purposes, unless your children can prove that they made contributions to those accounts. If they are owners in name only (which is quite common between parents and children) it's all taxed to you.
March 20, 2011

Finding a Professional Fiduciary

professional fiduciary.jpgDear Liza: We're in the process of establishing a Child's Trust as part of our estate planning; the Trust would exist until our daughter turns 35 (32 years from now; we're both about to turn 50).  We have created a list of four Successor Trustees, but each one is either our age or slightly older. Nolo's advice is to list a last choice a "private trust company." What's that?  It's great that you're thinking about how old your trustees are going to be when you daughter is 35--sadly, our trustees age right along with our kids. I am not familiar with the term 'private trust company' but I think Nolo may be suggesting that you consider naming a private fiduciary as a backup trustee. This is someone who is licensed to serve as a trustee, but is not a bank or a large corporate institution. Such people are licensed in California via the Department of Consumer Affair's Professional Fiduciaries Bureau. Alternatively, you might consider allowing your daughter to become the Trustee if none of the above can serve and she is over a certain age, say 28. (Serving as her own Trustee would give her management control over the trust, but still protect the trust's assets from her creditors or a bad marriage.) You might also, though, check with the bank where you do most of your business, you might find that their rates are competitive for trust services.


February 22, 2011

Gifts that Keep on Giving

gift.jpgDear Liza: My elderly parents are contemplating accelerating gifting of considerable assets to their children to take advantage of the current $5 million personal exemption in place through 2012. What are the consequences if they gift based on this exemption level and it is reduced before they die? Would the estate tax rules at the time of death apply regardless of what gifting was already conducted under the current law? I don't have a crystal ball, that's for sure. And many of the details about how this is going to work are yet to be worked out, to put it mildly.  And most estate planners are currently advising clients who can take advantage of the incredible gift tax break to do so.  Under existing law, your parents' gifts wouldn't be retroactively taxed if the rules change after they've made those gifts. It's just like income taxes -- you pay under the rules in place in the year that is relevant. If later on tax rates change, you haven't been required to repay taxes that would have been due in a previous year under then-current law. If your parents made any taxable gifts during their lifetimes, though, these have been part of the estate tax calculation that's made, but they get a credit for any gift taxes already paid. One of the areas of uncertainty, certainly, is what would happen should the gift tax exclusion be significantly reduced in future years--and I wish I could give you a better answer. For now, your parents, and everyone else,  are going to have to make a decision with imperfect information.
December 31, 2010

Adding Names to House Title

house.jpgDear Liza: I live in Illinois my mother owns a home worth about 250 to 300K. My mother seems to think there is some benefit to having my brother, sister and myself added to the title and having her removed.  I know the current lender will not approve of that unless we refi with our names.  If we were able to refi and remove my mother or if there was no mortgage balance is this a good idea?  All she is trying to do is ensure that we do in fact inherit this house when she does pass on.  Wouldn't naming us as equals in the will do the trick?  Will the house and any estate still go to probate even if there is a will and we are all alive and civil with one another?  If your Mom just wants all three of you to inherit the house, she should use a will, or a living trust, to make sure this gift is made upon her death, not put you on title now. Putting you on title now means that she's made a gift to each of you of 1/3 the value of the house, means that her house is subject to your creditors, and means that all three of you get the house at her original cost basis (what she paid for it). Inheriting the house upon her death means that she controls it during her lifetime, and that upon her death you three inherit it at the current market value (which probably means you'd pay less in capital gains taxes if the property is subsequently sold). If she makes the gift by will, you will be subject to probate, regardless of whether all three of you get along (which is, of course, great, but legally irrelevant). If she creates a living trust, the property can pass to you three free of probate. 
April 24, 2010

Senate Budget Panel Approves Plan with 2009 Estate Tax Numbers

Hmm. Maybe next year's estate tax exclusion won't go down to a million dollars per person. Bloomberg BusinessWeek reports this week that the Senate Budget Panel has approved a spending plan that includes an assumption that last year's estate tax exclusion of $3.5 million dollars, and last year's top estate tax rate of 45%, will be reinstated. That's really good news for  most of us, who don't have that much money to begin with. It means that most people will be able to pass their estates to their heirs without having to worry about the estate tax.

This may come about via the same reconciliation procedure that the Senate and House used to get health care legislation passed, so, it's not a done deal.

The story reports that "Senate Finance Committee Chairman Max Baucus, a Montana Democrat who is the chamber's chief tax writer, declined to say yesterday which tax provisions could be approved through reconciliation, which would allow Democrats to pass them in the Senate with a simple majority. Democrats control the chamber with 59 votes. "I have some ideas," said Baucus, adding "we don't even have a budget yet" and "we're getting way ahead of ourselves."

January 17, 2010

Carry-Over Basis: Another Estate Tax Repeal Oddity

Last week I wrote about the 'death' and probable re-birth of the estate tax by 2011, if not sooner. Today, though, I want to tell you about the new carry-over basis rules. Until now, if you inherited an asset from someone who died, you also got a new tax basis equal to the value of that asset at the time of death. That's called a stepped-up basis.

The cost basis is the dollar amount the asset was worth when you purchased an item (with certain adjustments), and it's that value that the IRS uses to determine if there's been a gain or a loss on the sale. You pay capital gains taxes on the difference between the cost basis and the sales price. A higher basis means less of a gain when you sell, if the value of the asset has gone up.

The stepped-up basis was a big tax break for heirs. What it meant is that if your mother left you a house worth $1 million dollars that she purchased for $100,000 and then you turned around a sold it for $1 million dollars, you'd owe ZERO capital gains tax on that sale. And it was an unlimited tax-break, you got that step-up on all of the assets inherited at death.

But not this year. Now, each taxpayer is limited to $1.3 million dollars worth of a stepped-up basis. It will be their executor's job to allocate that to particular assets, like a house, and therefore to specific heirs. There's also a $3 million step-up available to spouses for appreciated assets. But all other assets are to be valued at their original value.

So, if your father purchased stock in IBM for a pittance in 1963, you're going to have to find out what that was and pay capital gains on the difference between that value and what you're selling it for today. That's called a carry-over basis, and it is going to make accountants and heirs nuts as they try and figure out what the original values are for long-ago purchased assets. Not to mention how much fun it will be to pay all those captial gains taxes.

To read more about this, read Kathleen Pender's good summary from the SF Chronicle.

January 3, 2010

The Estate Tax is Dead; Long Live the Estate Tax

In a twist of Congressional inaction that no one honestly thought possible, Congress, by failing to act, has allowed the estate tax to be fully repealed in 2010. But, and get this, only for one year!

In 2011, unless Congress acts, the estate tax is scheduled to come back at levels not seen since 2001 (the tax would fall on any estate worth more than 1 million dollars and at rates ranging from 37% to 55%). The current law, passed in 2001, expires in 2011, so the tax comes back at 2001 levels, with an adjustment for inflation.

If that's not odd enough, most congressional watchers predict that Congress will actually pass a law re-instating the tax that will be retroactive to January 1, 2010 (so, as a matter of reality, there will be no actual repeal whatsoever!)

Which is to say that no one really knows what will happen over the next few months. But certainly, something will. I'll keep you posted.

For more, see this article in the Wall Street Journal, which offers a nice summary of the current state of affairs.

August 30, 2009

State Estate & Inheritance Taxes Too

At the moment, almost all of us don't have to worry about paying federal estate taxes at death. That's because the first $3.5 million of our estates can pass to our heirs tax free. Scheduled to expire in 2010, this limit is likely to be extended by Congress for at least another year and most experts think it is unlikely to be reduced significantly over the next few years.

But here's a new wrinkle--until 2005 most states collected a share of the federal estate taxes collected. But when that 'pick-up' tax expired, they began imposing estate taxes of their own to make up for that lost revenue.

Currently, 16 states and the District of Columbia impose their own separate estates taxes. And several states (Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee) also impose an inheritance tax. This falls on those who receive the money when someone dies. And, in many instances, the limit for tax-free transfers for both state tax regimes is less than that federal limit. Which means it's possible for an estate to be free of the federal estate tax while being subject to state estate tax or inheritance taxes.

So, for those doing estate planning in these states, make sure to consider the state angle when considering the probable taxes your heir may face.  

To learn more about federal and state estate taxes, see Nolo's Estate and Gift Tax area.

May 22, 2009

Estate Tax Update

capital dome.jpgThe current Congressional Budget Resolution includes a provision that will freeze the current estate tax exemption at current levels, allowing individuals to pass up to $3.5 million of their estate free of the estate tax. The resolution also freezes the maximum tax rate at 45%. Even if it passes, this provision expires after one year, leaving the future of the estate tax uncertain. Here's a link to a great article from Money magazine on rethinking your estate planning options, given the current economy and the uncertainty of future tax rates and exemptions.