Tuesday, January 12, 2010

Estate Tax? None or maybe.

Here is an entry by my colleague at the National Academy of Elder law Attorneys:

Update on Status of Estate Tax
By NAELA President Stephen Silverberg, CELA

Many NAELA members are concerned about the repeal of the estate tax and what this means to how they manage their clients’ planning needs. While it is the general consensus that the law will be reinstated retroactively, keep in mind that the general consensus was that we would not be in this position now.

To put it concisely, there currently is no estate tax, a $1 million gift tax exemption, a gift tax rate of 35%, and carryover basis subject to some exemptions.

The major issue you will come across in wills and trusts is when the disposing documents use formula bequests, such as leaving an amount equal to the estate tax marital deduction to the spouse and any excess to a credit shelter trust or outright to children. In such a case, since there is no estate tax and the marital deduction does not exist, there is a question of whether the marital deduction bequest will be funded. If it is not, the surviving spouse will receive nothing. It is possible that a court might interpret this type of provision to be determined by applying the laws in effect at the time the document was signed. A similar situation arose in 1981, when the unlimited marital deduction came into being. Prior to 1981, the marital deduction was limited to the greater of $250,000 or 50% of the estate. Where this formula was stated in the document, the unlimited marital deduction was not allowed. However, if the document stated “the maximum marital deduction allowed by law,” the unlimited marital deduction would apply.

Under Section IRC 1022, basis of his or her assets will "carryover" to those who inherit the property. However, decedent's executor may allocate up to $1.3 million to increase the basis of property but in no event higher than the fair market value as of the decedent's date of death.
 
The allocation of increased basis provision is not to increase the basis of property worth $1.3 million to $1.3 million, but rather to increase basis by $1.3 million.

For example, a child of the decedent inherits property worth $3million in which the decedent's basis at death was $1.5 million. The executor may elect to increase the basis of the property to $2.8 million. If the property were worth only $2 million when the decedent died, the executor could increase the property's basis from $1.5 million by $500,000 to $2 million (and no higher) and could allocate the remaining $800,000 of basis increase to other appreciated property (limited, again, to the fair market value of such asset at the decedent's death).
 
If the decedent is married, the decedent's executor can also allocate up to an additional $3 million to increase the basis of assets that the surviving spouse receives outright or through a QTIP trust (that follows the same rules that existed prior to 1/1/2010). Collectively, these items are referred to as "Qualified Spousal Property." Note that a QTIP trust qualifies for the estate tax marital deduction when there is an estate tax only to the extent the executor elects for it to qualify.  However, no such election is necessary for a trust otherwise described in Section IRC 2056 to constitute Qualified Spousal Property to which the $3 million basis increase may be allocated by the executor.
 

Friday, December 04, 2009

News You Can Use

Federal Estate Tax is set to be suspended at the end of this month, but the US House of Representatives passed H.R. 4154. If enacted into law, it would extend the current rates and exclusions permanently. Hot off the press (Dec.3rd) from the Joint Committee on Taxation is the following:  http://www.jct.gov/publications.html?func=startdown&id=3637. I found this to be a very useful summary of where we are today. The Senate must take it up and likely there will be changes.

Monday, November 23, 2009

1929 v. 2009

1929 Versus 2009.  In 1930, President Herbert Hoover believed that the recession had ended and that 1931 would bring a strong recovery.  It didn’t.  Of course, the Federal Reserve at that time was raising interest rates while the administration took a back seat approach to the problems.  Many, many banks failed and there were no bail outs.  We had bread and soup lines for years.  This time, we have historically low interest rates and the banks have been infused with cash from the government so they would not fail.  Perhaps we averted another Depression.  History will tell.

For now clients, estate planners, and financial advisors need to aware of the big opportunities presented to clients with such low interest rates.  We are doing Grantor Retained Interest Annuity Trusts (GRAT) that pass along wealth to the next generation at the lowest possible gift tax rates.  The low interest rate environment allows the parent to get an annuity at an historically low interest rate while the actual growth of the assets in the trust accrues to the children as remainderman at the end of the GRAT.  Low interest rates also lead to lower valuations of business interests.  These can be transferred at lower gift tax costs. When interest rates start their return to historical levels (let’s hope not to the 1970s level), it will be more costly to make these business interest gifts.

Sunday, November 15, 2009

Important 3rd Circuit Decision on Annuities

In Weatherbee v. Richman, the 3rd US Circuit Court of Appeals ruled that a Medicaid Qualified Annuity is not as resource to be counted against an applicant for Medicaid. An earlier case, James v. Richman, held that a Medicaid Qualified Annnuity was not a resourse, but those facts were prior to the DRA of 2005.  This will help community spouses maintain a higher standard of living after a spouse enters a nursing home.  The full case can be found at http://www.ca3.uscourts.gov/opinarch/091399np.pdf.