More estate tax confusion.

We thought it was settled: $5 million exemptions, 35% tax rates. Easy enough. Not so fast.

Rep. Kevin Brady (from the 8th District of Texas, an area North of Houston) has co-sponsored a bill that again tries to repeal the estate tax. His claim is that repeal of the tax would pour "billions of extra dollars into the economy," siting the reputable source of "conservative economic research," whatever that means.

I don't think this bill will have any traction, but is Brady correct? I don't think so. Of the less than 1% of Americans that get hit with any estate tax liability, I just can't see a scenario where the money that didn't go to the government would go directly back into the economy. I understand the thought that tax breaks=more spending=economic growth=job growth, but the trickle down theory of Reaganomics has never really panned out.  Granted, I don't trust the government to spend the tax dollars from keeping the estate tax to spur job growth either.

We have had an estate tax for a long time. Its controversial. Some states have an EXTRA estate tax on top of the federal one, be thankful Texas does not. However, even in those states, its tough to argue that killing the estate tax is always a good thing.

Do I want an estate tax? No, not really. I don't want to pay it if I am lucky enough to have more than $5 million when I die. I don't want to keep it just because I am an estate planning attorney, and its existence makes me money. However, I just cannot make the policy arguments in favor of completely eliminating it. At least not yet.

Without the estate tax, would we have the Gates Foundation, the Rockefeller Foundation, and the like? Maybe. Would we have new billionaires, like the founder of facebook, signing off to give away most of their wealth? I doubt it. Sure, they would give some, but with no penalty on keeping most of it, its hard to imagine there would be as much charitable giving.

But those are billionaires. What does this mean for us normal folk: 

If you have a family business or significant assets, you need to revisit your estate plan. Have an experienced estate planning attorney go over your will and other documents, or create one if you don't have it already. There are ways that you can limit the tax you might have to pay, or not pay any at all: but it takes some work. With changing times, its never to early to make sure you are prepared. 

Note: I met the guy in the picture on a sunny day in Washington, D.C. Pretty nice fellow, and makes a decent infomercial.

Living Trusts and the P-word.

You might have heard of something called a "Living Trust." You might have even been told that you need one. Why? Mainly to avoid the p-word. That's right, Probate. If you can avoid probate, you should, right?

Not so fast. Lets start with the basics.

Probate is a formal, judicial process where a court decides if your will is valid, appoints an executor (person to carry out what the will says), decides who can make claims against your estate. Probate is essential for assets that have a "title," like your house, land, vehicles, etc., so that your heirs can ultimately sell them if they want. You will need a lawyer for this, and you will have to pay him. Sounds like something you should avoid, until you realize...

All this happens after you are dead. You will never see the lawyer's bill,  you will not have to go to the courthouse, and unless you are taken advantage of, the probate process really is not very costly.

But, you are convinced, you need a living trust, because your neighbor has one, or you saw it on "legal zoom," or your insurance agent told you to get one.

This might be a good idea, if:


You Really are afraid of the P-word: If you know that your trustee (it can be you, but there are dangers in this) will be cost effective, then a "living trust" can save your estate money in the long run. Again, you will be dead and not able to enjoy it, but your children might thank you.

You want privacy: a will becomes public record. A trust stays private, and no one will know except the trustee, hopefully. But if your mistress is seen living in your vacation home and driving your car, it really doesn't matter, does it?

You want someone to manage your assets: By placing assets in a trust, you create a vehicle to manage your stocks, bonds, real estate..anything. And should you become injured or incapacitated, you will have the structure for someone else to step in and take over for you.

You are crazy: Literally. The formalities for creating of a trust are not as stringent as those for a will, meaning they are much less likely to be challenged by that one disinherited child, wife, or whoever.

Maybe these issues are important enough for you to want a "living trust." Great, more work for me, because you should always have an attorney prepare this document for you. This will cost you money. You will have to transfer assets to the trust, which again, costs you money. There can be state and federal taxes on transfers to revocable trusts (as well as transfer taxes on irrevocable trusts) that will cost you money. All these must be paid in a time that is commonly referred to as NOW, not later, when you die. Even with all this, it just might be cheaper than waiting until you die, so its worth it, right?

That's up to you. You will need a will either way (see earlier post), and you should have your situation analyzed by a competent estate planning attorney. Then you will have to decide if the cost now will really result in savings later on.

Who needs a will?

In short, you do, whoever you are. Of course you can get one when you are older, but that is only if you are 100% sure you know when you are going to leave this life for the next. So in the event you have had difficulty predicting exactly when you meet your demise, this article is for you.

The scenario that is often painted is the "what if you and your family were in an accident..," which is the easiest to grasp.

Say you have $100, or $100 million. You and your family have this horrible accident. Who would you want this money (or your house/car/coin collection/family farm...whatever you care about) to go to? The rules are straightforward, but they can lead to unwanted consequences if you are not careful.

In the above example, all your immediate family passes: if you parents are alive, it goes equally to them. If one of your parents is gone, if goes half to the alive parent, the rest to any siblings you have. No parents? It goes to your siblings. No parents or siblings? It goes to your grandparents, and if they are gone, then to your grandparent's descendants...that's right, your cousins and even more extended relations.

If any of those situations are not what you want, then you need a will. It gets better. If you don't have any family, at all, when you pass, your money goes to the state. THE STATE. Not your friends or your church or the Boy Scouts, the state gets to decide what you do with your money.

And that's just a will. What a competent estate planning attorney will also provide you in addition to your will are Powers of Attorney, Advanced Healthcare Directives, a Living Will, and other documents to ensure that if the unthinkable happens, you will have a plan in place so that what you want will actually be done, and the people you trust to make decisions on your behalf will have the power to do so.

Feel free to wait to make these documents, but lets hope your crystal ball doesn't steer you wrong.

Happy Holidays, New Tax Legislation Update.

Seasons greetings.

Its been ten days and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) is now on the books, with numbers that were similar to what was leaked before it was signed. Here is a synopsis of what the new legislation means:


Income tax: extension of the Bush Tax cuts until the year of 2012 ( rates of 10, 15, 25, 28, 33 and 35). 


Capital Gains/Dividends: The maximum rate will be capped at 15 percent (zero percent for taxpayers in the 10 and 15 per- cent income tax brackets) for 2010, and will extend until the end of 2012. 


Estate Tax:  A new estate tax regime, with 35% top rate and and $5 million applicable exclusion amount is in place until the end of 2012. The new law also allows portability between spouses: if one spouse does not use all $5 million, the estate can elect to allow the surviving spouse to use the rest upon their death. 


For those who passed during 2010, Congress gives you two options: 


1. Apply the new 35% and $5 million exclusion amount and receive "stepped up" basis treatment (this means assets like your house, stocks, etc. are valued at the date of death as opposed to their original purchase value, which can mean a huge tax savings assuming the assets have increased in value), or


2. Pay no estate tax, but your assets are allowed only a $1.3 million basis "step up," ( with the rest of your assets being subject to the carry over basis rules (assets are valued at the lesser of the decedent’s basis or the fair market value of the property on the decedent’s death).


Gift Tax: for gifts in 2010, the gift tax is limited to a $1 million exclusion amount, but after 2010 it is re-unified with the estate tax, for a unified $5 million amount. 


Generation Skipping Tax: The GST remains at a 0% rate for 2010 with a $5 million exclusion amount, and starting in 2011, the GST unites with the highest estate and gift tax rates (35%). 




Those are the highlights. There is a lot more to the legislation, but those are the big talking points for now.  More to come. 

Obama to act on Estate Tax

News is slowly leaking out that the recent Obama vs. the Republicans tax talks are going to include provisions for a new estate tax with cheaper rates and a larger exemption amount (35% top rate, and $5 million exemption amount).

Great news if you are a high net worth individual, but also if you were a small business owner or were concerned about paying any estate tax.

What will this mean for planning, gifting, and wealth management? Stay tuned.