George Gray Esq's Blog

Factoids on Wealth and the Estate Tax

ggray@gfrllp.com — Tue, 15 Jun 2010 18:58:00 GMT

CONGRESS ADDS A "SUPRISE" TO THE 2001 CHANGES TO THE ESTATE TAX

ggray@gfrllp.com — Wed, 09 Jun 2010 19:18:00 GMT

When Congress repealed the “death tax”, no one expected that it would actually come to pass even though it was touted as a sure way to save America’s small businesses and to greatly simplify the lives of those who owned them. Now that the tax is repealed (albeit for only one year) one must still wonder if the lives of small business owners (and others) have been simplified . An often overlooked provision of the 2001 Law that repealed the Estate Tax is the creation of the modified “carry-over basis” rules. The concept is simple! Provide the heirs tax relief for up to $1.3 million of inherited property by allowing a “step-up” in basis for those assets to their fair market value at the death of the decedent. Any other property would retain a “carry-over” basis, generally valued at its original cost. This way, the Federal Government could tax the amount of gain on the sale of any inherited property in excess of the $1.3 million threshold.

To place the modified “carry-over basis” rules in perspective, one must review the rules for valuing inherited property as they existed prior to 2010 (the good old days?). When a person died prior to 2010, all of the assets in his or her taxable estate were “stepped-up” to their value on the date of the decedent’s death. This netted two favorable outcomes: first, the heirs did not have to search the decedent’s records for the original purchase price of the inherited property; and, second, the amount of gain on the inherited property was measured from its date of death value, which in many cases was higher than the original purchase price. This “step-up” in basis came at a price of inclusion of the inherited asset in the decedent’s taxable estate. But, since the vast majority of decedents were not subject to the Federal Estate Tax, there was in effect no penalty!

Under the rules in effect for 2010 (and only that year) the decedent’s estate is allowed a basis increase of $1.3 million on inherited property. Thus, for estates of less than $1.3 million, all the inherited property is allowed a “step-up” in basis. The Executor of larger estates would have to pick and choose which property would receive the “step-up” and which property would be inherited with a “carry-over basis”, generally an amount equal to its original cost basis. Further relief is allowed a surviving spouse. Qualified spousal property receives an additional $3.0 million basis increase. Qualified spousal property includes outright transfers to the surviving spouse as well as property passing to a so-called Q-TIP Trust for the spouse’s benefit.

Setting aside the uncertainty of whether the modified “carry-over basis” rules will survive past 2010, one must wonder how the lives of taxpayers were made simpler by the application of these rules. Won’t the testator have to place instructions in his or her Will on which assets the “step-up” would apply? The application of the modified “carry-over basis” rules makes the selection of an Executor all the more important because the allocation of basis to property will benefit one heir and disadvantage another. In the absences of such direction in the Will, the Executor is left to his/her own judgment on basis allocation. Again, an allocation of basis has the potential to benefit one group of heirs and disadvantage another. What is the Executor’s liability in such circumstances? What happens if the law is not changed and taxpayers must revert to the rules as they existed prior to 2010? Will the property inherited by a decedent in 2010 adjust to the date of death valuation in 2011, or will the modified “carry-over basis” rules still apply?

If uncertainty were not enough, Congress enacted reporting requirement with the modified “carry-over basis” rules which may prove burdensome on the Executor. While no Estate Tax Return is required for decedents dying in 2010, an Information Return for Estates in excess of $1.3 million is required in 2010. This Information Return must include the adjusted basis of the property in the hands of the decedent at the date of death and the date of death fair market value of that same property. Thus, the Executor must engage in a “treasure hunt” to ferret-out when the decedent purchased property and what the decedent paid for that property. To show that the IRS is serious about the whole affair, there is a $10,000 penalty imposed upon the Executor who is required to file an Information Return who fails to do so. If the failure to file the Information Return is due to an intentional disregard of the filing requirements, there is an additional penalty measured at 5% of the fair market value of the property in the decedent’s estate.

The general consensus is that the Congress will visit the Estate Tax mess in 2010; and, hopefully it repeal the mistake called modified “carry-over basis” rules. I continue to monitor the situation and will keep you updated in the future.

Estate Tax Negotiations in the Senate Hit Turbulence

ggray@gfrllp.com — Wed, 09 Jun 2010 19:11:00 GMT

Recently I read an interesting article put out by the Dow Jones Newswires. It reported that Senators seeking a bipartisan deal to handle the Estate Tax mess created by Congress have reached a standstill as several Senate Democrats strongly condemned the efforts to reduce the rates.

President Obama has proposed exempting Estates worth less than $3.5 million, or $7 million for couples, and taxing wealth above that amount at a 45% tax rate. The Obama plan would add to the deficit, since it is a tax cut compared to current law and “pay-as-you-go” budget rules require most tax cuts to be offset with new tax increases or spending cuts. However; Congressional Democrats agreed to waive that requirement for 2011 and 2012 with respect to the President’s Estate Tax proposal.

Senators that want to reduce Estate Tax rates even further have in the past two weeks closed in on a compromise that would start at Obama's proposed levels in 2011, but gradually phase down to a 35% rate and a $5 million exemption level.

An interesting additional proposal discussed by the Senators is the concept of creating pre-paid trusts, under which individuals can benefit from a lower Estate Tax rate if they pay the government in advance of their death. This would generate revenue in the short term as some Estate owners take advantage of the pre-paid option, but would result in lost revenues in later years.

On Tuesday, May 18^th the Senators said that the Senate proposal was “in limbo.” "Nothing is clear about how the Estate Tax will be considered," said Sen. Jon Kyl (R., Ariz.), the lead Republican in the negotiations. "Last week I believed there was an agreement on what the details were going to be. That may not be the case now." Senator Baucus (D. Mont.), Chairman of the Senate Finance Committee, is reported to have said "There's no agreement on estate tax, neither on substance nor on process. None whatsoever." Senator Baucus is one of two Democrats involved in talks with Republicans, the other being Sen. Blanche Lincoln (D., Ark.).

According to some Senators present at a closed-door meeting of Democrats on Tuesday (05/18), several Senators denounced the plan in strong terms Certain Senators argued that with problem budget deficits and with many Americans still out of work, it is the wrong time to cut taxes on the richest Americans. Sen. Bernard Sanders (D., Vt.), one of the Senate's most liberal members, said "[t]he idea that we would make significant exemptions within the Estate Tax to give more tax breaks to the top three-tenths of 1% is nauseating. I will do everything I can to stop that."

Apparently, it is still “politics as usual”. I’ll let you know as this drama unfolds.

April 2010 Estate Tax Update

ggray@gfrllp.com — Thu, 15 Apr 2010 14:34:00 GMT

April Update -- Now that Congress has returned from the Easter recess, it will have a number of tax issues to face. Among them is the Estate Tax "mess" created by its inaction in 2009. While the House passed legislation addressing the Estate Tax in early December 2009; the Senate has not yet taken up the matter More...

Special Needs Planning

ggray@gfrllp.com — Tue, 02 Feb 2010 23:46:00 GMT

Special Needs Planning demands the attention and takes much of the "free" time of parents of a person with a disability. A topic often thought about but not understood is the formation and operation of a Supplemental Needs Trust (a "SNT"). SNT are fully sanctioned by both State and Federal Law and will not affect the Governmental Benefits of an individual with a disability (the "beneficiary"). There are three types of SNT's: a first party trust, a third party trust and a pooled trust. A first party trust is funded with the beneficiaries own money, often a personal injury award or an inheritance. If the money is used to fund the SNT, then it will not be counted as an available resource. This will continue the beneficiary's eligibility for Government Benefits or allow him/her to apply and receive Government Benefits. The big advantage of a first party SNT is that it provides a suorce of funds for goods and services that enhance the life style of the beneficiary, such as, uninsured medical expenses, experimental or alternate medical treatments, internet, computers and vacations. Just about anything but food and shelter can be paid for by the SNT. A distinguishing feature of a first party SNT is that when the beneficiary dies, the money left in the SNT must be used to "pay-back" the state for the medicaid benefits the beneficiary received during his lifetime. A third party SNT is funded with money from someone other than the beneficiary, such as a parent, grandparent, aunt, uncle or special friend. Third party SNT's function the same as a first party SNT to enhance the life style of the beneficiary. The major difference is that when the beneficiary dies what remains in the SNT does not have to be used to "pay-back" the State. Instead, it can be paid to someone else, such as a child, grandchild, niece or nephew. A pooled SNT is sponsored by a charity and is very useful when the beneficiary does not have a close relative or friend to serve as Trustee or the amount involved is not enough to warrant the formation of an individually created SNT.

Thoughts on the Estate Tax

ggray@gfrllp.com — Thu, 14 Jan 2010 15:35:00 GMT

1. Good News/Bad News

There is good news and bad news concerning the Senate’s inaction on the Federal Estate Tax in 2009. The bad news is that the confusion concerning the Estate Tax and the uncertainty it entails makes planning all the more difficult. A Columbia University professor calls it “congressional malpractice.” I don’t think anybody believes that the Congress will allow the Estate Tax “go away” for 2010; and, most think an Estate Tax in some form will be enacted in when the Congress reconvenes. At the heart of the matter is the Unified Credit Amount ($3.5mm in 2009) and the Estate Tax Rate (45% in 2009). The good news in all this mess is that the House of Representatives would make permanent the Estate Tax Rate and Unified Credit Amount at their 2009 levels and that some Senators were pushing for the Unified Credit Amount and the Estate Tax Rate to be increased to $5.0mm and 35% respectively. This bodes well that the Estate Tax will remain in a form familiar to most planners.

2. Macabre Thoughts

Currently the Estate Tax is actually paid by 5,500 Estate each year. This means that approximately 15 taxpayers will die each day who would benefit from the lapse of the Estate Tax in 2010. Some have mused if it is ethical to keep a loved one on life support until after the New Year to take advantage of Estate Tax repeal in 2010. A recent Wall Street Journal reported that one large law firm on the West Coast has actually included language in a Health Care Proxy to permit the proxy to consider “Estate Taxes” when he or she was faced with the decision to “pull the plug” on a rich loved one. Because of the “congressional malpractice”, never has the issue of when you die been more important.

POWERS OF ATTORNEY: What You Should Know

ggray@gfrllp.com — Wed, 18 Nov 2009 04:21:00 GMT

Introduction – In New York, a person (known as the "principal") may make a Power of Attorney (a "POA") to authorize another person (known as an "agent) to act on his behalf in financial matters. The POA is widely used for financial and estate planning purposes and for avoiding the expense of guardianship in the event of the principal’s incapacity. POA’s grant to the agent broad authority to spend the principal’s money and sell or dispose of the principal’s property with or without the principal’s prior knowledge! This grant of authority has often been made by principals who did not fully understand the scope of the powers granted, and as a result it has led to much abuse. More...

THE BASICS OF LIFETIME REVOCABLE TRUSTS

ggray@gfrllp.com — Wed, 18 Nov 2009 04:19:00 GMT

Revocable Trusts (also called "living trusts") have continued their popularity as an alternative to a traditional Will and to the "probate process". A Revocable Trust is a trust created by a written document signed by a "Grantor" (also called a "Settlor") during his/her lifetime which names a "Trustee" and one or several "Beneficiaries". Typically, the Grantor names him/herself and a spouse as the Co-Trustees and sometimes names an adult child or close family member as an Alternate Trustee. In all instances, the Grantor and his/her spouse are the primary Beneficiaries during their joint lifetimes.
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The Basics of Estate Planning

ggray@gfrllp.com — Wed, 18 Nov 2009 04:16:00 GMT

Since the Estate Plan is only as good as the information upon which it is based, you should gather, write down and share with your advisors (insurance, financial and legal) the essential information about the nature and extent of your assets, your family background and your wishes upon your death. This information, besides providing a record of the essential information for the Estate Plan, is a good jumping off point for discussing the Estate Plan basics with your advisors. More...

The Basics of Supplemental Needs Trusts

ggray@gfrllp.com — Wed, 18 Nov 2009 04:08:00 GMT

A supplemental needs trust (SNT) is a trust established for the benefit of a disabled adult (the "beneficiary") which does not jeopardize the Beneficiary’s eligibility for governmental benefits. The use and purpose of a SNT is to provide funds to the disabled adult for items which supplement but do not supplant, impair or diminish, any benefits, assistance or payment of any governmental entity for which the Beneficiary may otherwise be eligible or which he or she may be receiving. Most importantly, the property and assets in a SNT are disregarded as a resource of the Beneficiary for purposes of determining the beneficiary’s eligibility for Medicaid and Supplemental Security Income Benefits ("SSI"). More...