Salt Lake City Estate Planning

Estate Tax Planning...Prepare for the Worst

These days, most people are aware that there is a lot of confusion surrounding the estate tax.  As an estate planning attorney / tax attorney, I have the pleasure of planning for a lot of unknowns and confusion regarding my clients' affairs.  That is my job.  Look at the unkowns and confusion and plan for it and straighten it out...Thus, the current situation regarding the estate tax is intriguing for me...but is not new to me (or more estate planning and tax attorneys).

With congress now in post-election turmoil and heavy ideological differences at stake, there are many things that we simply can’t yet know and this makes planning both essential and baffling for clients. Amongst the greater issues coming to the forefront is the looming return of the estate tax. The estate tax – also known as the “death tax,” “inheritance tax,”  or "wealth redistribution tax" depending on one’s persuasion – has been suspended entirely for 2010. The suspension was the result of the inability of a divided congress to come to a decision, and so too, now we must wait on a divided congress to come to a decision on what is to happen next. Without Congressional action, the hiatus on the estate tax will dissolve on schedule and thereby return to the last status of the tax, as it was in 2001, with an exemption of $1 million and a top rate of 55%.  Yes...this is the "worst" situation that most estate planning attorneys are planning for.

Morningstar Advisors throws a spotlight on the problem from all angles in their October/November issue. If you have much to lose because of the return of the estate tax, they advise that you prepare for the worst. It’s also wise to look at how the estate tax may play out in various circumstances – such as for “ordinary” middle class couples, blended families, same-sex couples, families with special needs children, and family businesses. Be sure to check out their tips for common family situations.

Whatever your situation is, it’s important to know what’s going on and how it affects you, but it is most important to have a plan with a competent advisor to help you and your family pass safely through this shifting terrain.  I encourage everyone to become as educated as they want, but to also remember that estate tax planning is complex, so you need quality advisors.

Learn more about the federal estate tax on our website, including our handy estate tax calculator. Also, be sure to sign up for our free monthly e-newsletter, and follow this blog for updates.  And if you are into it, follow our estate planning news on Twitter and Facebook, or follow our general law firm news on Twitter and Facebook.

Inheritng Real Estate or Passing Real Estate to Heirs

"My father died and left the house he lived in to his wife, my stepmother... My father told me the house would be mine and that he had life insurance to pay it off if anything happened to him."

-NORTH JERSEY.COM (OCT. 17 2010): INHERITING PROPERTY FOLLOWS SIMPLE RULE: PUT IT IN WRITING (http://www.northjersey.com/realestate/105124109_Inheriting_property_follows_simple_rule__Put_it_in_writing.html)

 

I wish it weren’t true, but the above scenario is one that is played out all-too-often within families. The writer in this particular instance says she had been paying the mortgage, insurance, homeowners’ association dues and taxes on her father’s house for the past ten years, with the (apparently verbal) promise that the house would be hers when he passed. However, it appears that the house was left to her father’s wife, this woman’s stepmother. She wonders now what recourse she may have. (Read the entire story online NorthJersey.com)

When it comes to real estate, a gift of any current or future interest should be made in writing, and memorialized with the appropriate legal documents (a will, trust, deed, etc.). In the absence of legal evidence to support this woman’s claim, it is very possible that she is simply out of luck. She may be able to recoup some of her money by filing a claim against the estate, but even that is not a sure bet (and even if she is successful, she likely won't recover all she has paid).

If you have an “informal” arrangement with family members regarding real estate, or other estate assets, I would encourage you to “formalize” it with the appropriate legal documentation sooner, rather than later. Certainly before the financial stakes are as high as they became for the woman in the NorthJersey article.  A basic revocable trust and beneficiary designations could have resolved the concerns raised by the woman in the NorthJersey article. 

Visit our website to learn more about fundamental estate planning, such as wills, revocable trusts, insurance trusts, and powers of attorney.  If estate and gift taxes a a concern, we offer free inforamtion on those topics as well.  And finally, if you find yourself in a situation simlar to the woman in the article, we offer assistance in estate and trust administration (including estate and trust contests and dispute resolution).

Headline Regarding the Federal Estate Tax

"If the Congress doesn't do anything by the end of 2010, the estate tax will go back to 2001 levels with a $1 million personal exemption and a maximum rate of 55 percent. Why haven't they done any­thing yet?"

--THE MONTGOMERY ADVERTISER (OCT. 17, 2010):CONGRESS UNLIKELY TO TACKLE ESTATE TAX (http://www.montgomeryadvertiser.com/article/20101017/BUSINESS/10160352/Congress-unlikely-to-tackle-estate-tax)

We certainly have seen plenty of speculation about the fate of the federal estate tax this year. I have my opinions and every other attorney and tax expert has theirs.  Unfortunately, there is not a lot of consensus amount tax attorneys.  Oh....Just in case you missed it, this is the year the federal estate tax was repealed – for one year only. Unless Congress takes some action otherwise, however, the tax will return January 1, 2011 … reverting back to the 2001 rules with a $1 million personal exemption and a maximum rate of 55 percent. Economists and politicians have weighed-in on the subject all year long. At one point, virtually all of the “experts” agreed that Congress would “most likely” institute a $3.5 million exemption amount and a top rate of 45 percent, and applied it retroactively to 2010.

Most now agree that is an unlikely scenario...but they don't agree what exactly will happen.

Columnist John Norris writes convincingly that he thinks Congress will not act, and that the 2001 rules will go into effect next year. He suggests that if your estate exceeds $1 million, you consider getting yourself to an estate attorney. I would have to add that, if you have not planned or updated your estate plan recently, it’s time to get moving … whether your estate exceeds the $1 million exemption or not.  It may also be time to add some insurance to your estate to cover taxes or replace wealth that is dissapated because of taxes (especially for owners of small businesses, family farms, and real estate).

You can learn more the federal estate, and even project how the return of the estate tax could affect you by using the handy Estate Tax Calculator on our website. Use this calculator to project the value of your estate, and the associated estate tax, for the next ten years. Also, if you’re ready, you can use this handy form to request an estate planning consultation.  The estate and gift taxes are comlex to navigate--so I highly recommend retaining an attorney that devotes a substantial portion of his or her practice to estate planning to assist you with planning your estate.

ESTATE PLANNING / LIFE INSURANCE

"The life-insurance industry has enjoyed beneficial tax treatment for its products for nearly a century. Whenever Congress tried to change that, insurers always had a mantra at the ready: We protect widows and orphans."

-THE WALL STREET JOURNAL  (OCT. 3, 2010): SHIFT TO WEALTHIER CLIENTELE PUTS LIFE INSURERS IN A BIND

Strategic use of life insurance frequently is a key aspect of comprehensive estate planning, solving a wide variety of estate planning challenges from providing liquidity to pay estate taxes, to charitable bequests and ensuring the continuation of a closely-held business. One of the key characteristics of life insurance, making it such a versatile estate planning tool, is preferential tax treatment. Properly structured, life insurance proceeds pass tax-free to beneficiaries, and earnings on investments held within certain types of “permanent” life insurance also generally accrue tax-free.

According to a recent article in The Wall Street Journal, there is some national debate, however, about the tax-preferred status of life insurance.  Once primarily a safety-net against the impoverishment of widows and orphans, life insurance has increasingly become a tax-advantaged investment and estate planning tool. 

High-end policies for $2 million and up, which can carry annual premiums of $20,000 or more, made up nearly 40% of the face value of new whole-life and universal-life policies sold in 2007, according to an analysis done for The Wall Street Journal by Limra, an industry-funded research group. Such large policies accounted for just 10% a decade earlier, and 1% two decades ago. 

Meanwhile, the percentage of American families owning life insurance continues to fall. Thirty percent have no life-insurance coverage of any kind, a four-decade high, according to a Limra survey. In an effort to reverse this trend, some insurance companies are experimenting now with policies for sale through banks that can be issued more speedily. Prudential, Allstate, MetLife, and ING Group are among those trying new approaches that aim to sell policies more cost-effectively to the middle class.

Due to the current situation regarding the estate tax, it might be prudent to acquire additional life insurance--and make sure ownership is properly structured to afford maximum benefit (irrevocable life insurance trusts are frequently a great way to own life insurance).  Of course, if there are substantial changes in the tax treatment of life insurnace, we will try to blog about it or update you in our newsletter.

The Estate Tax In the News

I recently came across another articles about the estate tax in the news on CNNs finance website (see Estate Tax in Limbo). It again shows the confusion surrounding the estate tax and its future. Indeed, we must plan for the worst (reenactment of the estate tax in 2011 with an exclusion of $1 million) and hope for the best (a higher estate tax exclusion level). Planning for various outcomes regarding the estate tax can be accomplished with the right provisions in your revocable living trust. Make sure you consult with an estate planning attorney knowledgeable in estate tax issues to assure your revocable trust is properly drafted. There is a push to pass estate tax reform, but no one seems to really know whether anything will be finalized. Only time will tell. I am not optimistic that the final resolution to the estate tax confusion will be a high estate tax exclusion (e.g., $5 million)--I think the government will be looking for revenues wherever they can be found and that at the lower exclusion levels, there still aren't very many estates that will be hit with estate tax (as a percentage of people dying). Also, increasing revenue through estate taxes may be easier than increasing it through income taxes--especially in a rough economy. Again, however, no one really seems to know what will happen to the estate tax, so the confusion may continue for a while yet. If you would like to learn more about the estate tax, please call me for a free consultation or register on my website (www.hunterestategroup.com).

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