Monday, May 24, 2010

Federal Estate Tax Legislation? Not So Fast!

Just last week it appeared that a deal had been reached in the Senate Finance Committee to submit new Estate Tax legislation for a Senate vote. The proposal would have brought back the $3.5 million per person exemption that was in effect in 2009, but indexed for inflation. The proposal would have also allowed for the "prepayment" of estate tax at a lower rate (the highest rate would be 45%).

But The Hill is reporting that the agreement between the parties has collapsed. Apparently Senate Democrats on the Committee are refusing to submit the proposal for a vote unless they know that they have a majority of party members in support -- which apparently is not the case.

Interesting, Senator Kyle is quoted as discussing Estate Tax "reform" rather than "repeal"; clearly, repeal is a dead issue unless the Republicans take bake the White House and both Houses of Congress, with a filibuster proof majority in the Senate. Recognizing that is unlikely, Republicans are willing to accept as large an exemption amount as they can get under the present political and economic realities.

So, the dance continues ...

Friday, May 21, 2010

Finally Some Movement on Federal Estate Tax Legislation?

Bloomberg Businessweek reported today that as part of the Senate Budget Panel's $3.7 trillion spending plan, it is proposed that the Federal Estate Tax be reinstated at the 2009 exemption amount of $3.5 million per person, with a top rate of 45%. One difference between this proposal and the estate tax rules contained in the existing EGTRRA law is that, if approved, the new Estate Tax exemption would be indexed for inflation.

I think this is a reasonable exemption amount that provides certainty and protection for the vast majority of Americans; I hope it passes quickly.

Common Estate Planning Myths

In my over two decades of practicing law, I have heard the same estate planning myths repeated time and time again. Here are some of the most common misconceptions:

1. The surviving spouse automatically assumes ownership of the deceased spouse’s assets – many people believe that by the mere existence of a marriage, the surviving spouse inherits the deceased spouse’s individually owned assets upon the spouse’s death. Unfortunately, the law makes no exception for a surviving spouse. If assets are owned only in one spouse’s name, upon that spouse’s death his or her estate will need to be administered via a probate proceeding. If the decedent had a will, the assets will pass as directed under the will (typically to the surviving spouse). If there is no will, then the deceased spouse’s individually owned assets will pass under the state’s intestacy rules. In New York, if a person dies with no will leaving a spouse and children, then the bulk of the deceased spouse’s assets will pass as follows: fifty percent to the surviving spouse, and fifty percent among the deceased spouse’s children –a result that few married couples desire.

2. It is too late to protect your assets if you are in (or about to enter) a nursing home – It is commonly believed that a person already in, or about to enter, a nursing home must “spend down” all their assets before becoming eligible for nursing home Medicaid coverage. In reality, even in such a “crisis” situation fifty percent or more of the Medicaid applicant’s assets can typically be preserved.

3. Gifts to any individual in excess of $13,000 per year will require the payment of gift tax – In addition to the $13,000 “annual exclusion” gifts that any individual may make to any other person (excluding a spouse, to whom unlimited gifts may be made), there is also a $1 million lifetime per person gift tax exemption. So, it is quite rare that anyone making gifts will ever actually have to pay a gift tax. For example, if a parent makes a $23,000 gift to a child, the first $13,000 of the gift would be applied against the annual exclusion amount. The remaining $10,000 portion of that gift would result in a $10,000 reduction of the parent’s $1 million lifetime gift exemption. If the parent had never utilized any portion of their lifetime gift exemption, then they would have $990,000 of that exemption remaining. The $10,000 portion of the gift in excess of the annual exclusion amount would be reported on a form 709 federal gift tax return, but no tax would be owed.

4. Life Insurance is “tax free” – In the vast majority of cases that I review, the insured under a life insurance policy is also the owner of that policy. In such a circumstance, when the insured dies, the death benefit will pass to the named beneficiaries’ income tax free. However, the entire death benefit will be includable in the insured’s estate, thereby rendering the death benefit subject to estate taxes. This rule applies even to term policies. For example, assume a New York resident who owns a $1.5 million term life insurance policy and $1.5 million in other assets were to die in 2011. Under current law, his estate would owe $945,000 in state in federal estate taxes. If instead the $1.5 million life insurance policy were owned in a “life insurance trust,” the total estate tax liability would be reduced to $210,000 – resulting in a tax savings of $735,000!

Thursday, May 13, 2010

What, Did She Forget To Send A Mother's Day Card?

As reported this week in the Village Voice, a Manhattanite left her $8.4 million estate -- including two apartments in the Dakota (the building where John Lennon lived when he was murdered) -- to her long-time butler.

The decedent's will specifically disinherited her daughter and two grandchildren.

Monday, May 3, 2010

Do-It-Yourself Estate Planning Document Preparation Websites Are No Substitute For Competent Counsel!

A just-published ElderLawAnswers study of three web-based estate planning document preparation companies concludes that while these do-it-yourself websites will allow you to inexpensively create estate planning documents, they are no substitute for a knowledgeable estate planning attorney.

As discussed in this white paper, the authors reviewed three of the most popular do-it-yourself websites. While each of these websites allows the user to create estate planning documents that may in fact be valid, the White Paper confirms that they are no substitute for an experienced estate planning attorneys' guidance and counsel.

Given that I'm an estate planning attorney, am I biased? Guilty as charged! But experience tells me that those people for whom the cost of "the documents" is the paramount concern would never pay for the advice, counsel and experience that I bring to the table. While their "up front" cost will certainly be less than my design and counseling fee, the overall cost of their estate plan -- factoring in the up front costs, funding costs, maintenance costs and settlement costs -- will typically be more than the overall fee that would be charged by our firm for all of those planning "steps." And, for all the reasons stated in the White Paper, clients who work with an experienced estate planning attorney to create an customized estate plan will receive results that are superior to those received from a do-it-yourself online estate plan.