Estate Planning

Sometimes NOT Having A Tax Can Actually Create A Problem for Taxpayers:

Insurance Trusts and Generation Skipping Taxes in 2010

No Generation Skipping Taxes.

Since January and through the end of December of 2010, there is no Generation Skipping Transfer (GST) Tax, unless Congress changes the law in the meantime. The GST tax was part of the temporary repeal for one year of the estate tax, which automatically expires at the end of 2010. Starting January 1, 2011, the estate tax and the GST tax come back in full fury with up to a 55% rate of tax. Your estate can suffer both an estate tax and a GST tax at 55% each.

Insurance Trusts.

Trusts which own life insurance are one of the most efficient ways to avoid estate and GST taxes. Over the lifetime of the life insurance policy, the taxpayer may pay $300,000 in premiums, but the taxpayer’s heirs receive $1,000,000 of the death benefit of the life insurance tax free if the insurance is owned by an Irrevocable Life Insurance Trust. If the taxpayer still owns or controls the life insurance (not owned by an independent trust), then the taxpayer may have to pay estate and GST taxes at rates up to 55% on the $1,000,000 in 2011 and thereafter. People are often confused by this because there is no capital gain tax on the difference between the $300,000 paid for the policy and the $1,000,000 death benefit to the heirs. But, there is an estate tax on life insurance proceeds you own which is not in a trust even though there is no capital gains tax on the “profit”.

Creating the Insurance Trust.

Fred creates a life insurance trust, transfers the initial premium payments to the trustee of the trust (his CPA) and the CPA as trustee purchases the life insurance policy on behalf of the trust. The result is that when Fred dies, the $1,000,000 death benefit is available to Fred’s heirs with no estate taxes. If the life insurance trust creates lifetime trusts for Fred’s two children, Ellen and Paul, then Ellen and Paul split the $1,000,000 in their lifetime trusts and Ellen and Paul pay no estate taxes in their estates on the life insurance proceeds. Fred loves his grandchildren and sets up this life insurance trust to say that when Ellen and Paul die, then the grandchildren can also receive the remaining money in the insurance trust without any estate taxes. This can go on for generations and create a “Dynasty Trust”.

Annual Gifts of Premiums.

Each year Fred sends the annual premium of $20,000 to Fred’s CPA and the CPA pays the $20,000 for the annual premium payments for the insurance owned by the trust. Each year, the CPA sends a notice to Ellen of her right to take out $10,000 each year for 30 days and sends the same notice to Paul for his $10,000. Each year, Ellen and Paul do not ask for their respective $10,000. As a result, if proper procedures are followed, the $20,000 paid each year is exempt from gift taxes (which could be due from Fred) and if Fred’s total gifts per year are less than the annual exemption per person, $13,000 this year, then there is no gift tax paid on the $20,000 and no decrease in the $1,000,000 gift tax exemption of Fred.

Generation Skipping Trust Gifts.

If Ellen has the ability to unilaterally decide when she dies who gets her accumulated annual $10,000 gifts to the insurance trust, then all of the $10,000 gifts are part of her taxable estate as well as her $500,000, her 50% share of the $1,000,000 life insurance death benefit. We want the benefit of excluding this $500,000 from the estate of Fred and also from the estate of Ellen. So, we do not give Ellen the right unilaterally to decide who may get her accumulated $10,000 annual premium payments. When we do this, two things occur: (1) It is not part of Ellen’s taxable estate and (2) the $10,000 annual gift for the benefit of Ellen to the insurance trust does not qualify as a gift exempt from GST taxes. Unless we do something, the $1,000,000 death benefit could be subject to the 55% GST tax. What normally is done is that the CPA files a gift tax return each year using $20,000 of Fred’s exemption from the GST tax. This is a highly leveraged beneficial use of the GST tax exemption. Many insurance trusts are set up this way.

No Tax, No Exemption.

In 2010, there is no GST tax and therefore no exemption from GST tax. In 2010, the CPA can not file a paper with the IRS claiming a $20,000 exemption from GST tax. Does this mean that part or all of the death benefits are in the taxable estate of Ellen or Paul or is subject to GST tax in the estate of Fred? For all of those who have such insurance trusts, it is necessary that you take action quickly to solve this problem.

Loan the Premium.

The solution that many advisors are recommending is that instead of gifting the $20,000 in 2010, Fred should loan the $20,000 to the CPA in 2010 to avoid this problem. The insurance trust, not the CPA, is the borrower. In future years, the loan can be paid back to Fred either from additional gifts by Fred to the trust or a loan from the insurance policy.

Action Necessary if You Have an Insurance Trust.

If you have an insurance trust, be sure to analyze whether your trust has this problem in 2010.  If so, we strongly suggest you seek the help of a seasoned Estate Planning Attorney as soon as possible.  The Estate Planning Attorney Preferred Provider we recommend is Roger McClure, President of Washington Wealth Counsellors.  He can be reached at roger@wealthcounsellors, or (571) 633-0330.

Special Needs Trusts

Food For Thought on the Government’s Role in the Future of Special Needs Trusts?

The need for care among those loved ones with physical or mental disabilities is increasing while the federal and state programs for them are being cut or unable to keep up with growing demand and expenses. No one wants a loved one to be forced to live in an unsanitary and abusive institution. There remain many excellent governmental programs that are only available to those who do not have money. You can’t buy your way into many of the better programs. Instead, parents and planners for those with special needs should realize they will have to set up their own social service safety net for their loved ones.

Families Today are Losing Valuable Government Benefits

For families and parents with children with mental or physical conditions which limit the ability of children or loved ones to earn a living, their greatest fear is what happens to their child when the parent dies and is no longer able to care for the special needs child. Often such children receive important government benefits for medicine, care or housing.

For example, If the parents leave an inheritance outright or in trust, the existence of such funds may cause the special needs child to lose their government benefits. Parents look to Special Needs Trusts to solve this problem.

Government Program Requirements.

Each county, state or federal governmental program can have different eligibility requirements for governmental programs for disabled persons.

For social security disability where the person has contributed a long time into the social security system, at the present time, there may be no limits on the assets or income a person may have to qualify for benefits.

In contrast, for Medicaid, which has a combination of federal and state eligibility requirements, the single person usually may not have more than $2,000 of countable assets (called “resources”) and nearly all of their income they have will first have to go to pay for the costs of their care. If a person has more than $2,000 in resources, the Medicaid program may require that person to exhaust all of their money for their care in a nursing home until they only have $2,000 left. Or worse, if there were any gifts during the five years prior to applying for Medicaid, they may be disqualified from Medicaid for a time period equal to what the gifts would have paid for their care. Each state and federal program can have complex eligibility rules which rival the US tax code in complexity and difficulty to understand.

Special Needs Trusts.

The concept of the Special Needs Trust is to have a trust which can supply limited needs of the special child without losing their governmental benefits. The traditional “Special Needs” often only provides for limited items such as vacation travel which the government would not pay for and often prohibit use of the funds in the trust for the food and housing of the special child.

In contrast to this focus on government welfare benefits, a properly drafted Special Needs Trust can be a very flexible document that can give the trustee the ability to pay for almost any need the beneficiary might have. The specific rules vary from state to state. Parents want to help their special child and still have the child qualify for a government program and these may be conflicting goals for many programs.

Preventing Abuse.

Stephen W. Dale, a California attorney specializes in working with families with children who have disabilities and who will require support from others for their entire lives. Stephen Dale was a psychiatric nurse for seventeen years and personally treated persons with psychiatric problems in institutions and elsewhere before becoming a lawyer. Many consider Dale a national expert. His passion is to serve as an advocate in the prevention of abuse and mistreatment of persons with mental health problems.

Growing Needs.

Dale points to the increase in needs for services and the decrease in the funding available for those needs. In 2006, there were nearly 225,000 cases of US children with autism ages 6-22. In 2006, there were an estimated 25 million adults aged older in the US with serious psychological distress. About 4.4% of US adults may have some form of bipolar disorder. In 2006, about 9.2% of the US population 12 or older had substance abuse problems.

Declining Funding.

State and county budgets are pressed. For years in the Virginia legislature, there has rarely been enough funding to meet the needs of persons with mental health issues. According to Dale, California counties have nearly eliminated their mental health programs and the state is dismantling its social service systems. Other states are or will follow the lead of California.

Federal Budget Deficits.

This year, there was a time when social security payments were less than the program’s income. Entitlement spending (social security, Medicaid and Medicare) will consume the entire federal budget by 2052, with no money available for defense, highways or parks.

In 2010, the Heritage Foundation estimates that Medicare, Medicaid and all other health costs will consume 17.2% of the US economy, up from 4.7% 50 years ago. The total national debt is $12.4 trillion, but the unfunded obligations for social security and Medicare are $45.6 trillion, almost four times the national debt.

In short, due to budget problems, the federal government will have to eliminate eligibility for government assistance for any person with a disability where that disabled person has any kind of Special Needs or other trust or money set aside for their benefit.

The Grim Prediction of the Future.

Many predict that a Special Needs Trust that qualifies a child today for continuing government benefits will not qualify for government benefits in the future. This is but one of the fundamental flaws in conventional planning for special needs children. A properly drafted and administered Special Needs Trust in reality is a private social system that should serve as the parent’s alter ego to provide quality of life and life long advocacy.

Need Help or Have Questions Regarding Estate Planning Matters?

If you would like to discuss any these details (or other estate planning matters) at no cost, contact our Preferred Provider for Funeral Estate Planning suppport.  Roger McClure, at (571) 633-0330 or visit  http://www.wealthcounsellors.com.  Roger can help you go over whether your plan is up to date, uses all of the new exemptions and how you can take advantage of current rules.  Here is some information about Roger:

Roger McClure is a practicing attorney with over thirty years experience. He maintains a business, estate and charitable planning law practice based in Virginia.  His undergraduate degree is in international Studies and he holds a Masters Degree in Political Science from Northwestern University and a Juris Doctorate with honors from the Ohio State University Law School.

McClure has conducted civil and criminal trials in local courts, represented creditors in bankruptcy proceedings, and litigated antitrust and trade regulation cases involving the largest corporations in America in federal regulatory proceedings. He served ten years in the Virginia legislature (House of Delegates), has been a radio talk show host, received a bronze star for service in Vietnam, and has written and published several books and numerous articles.

He is a sought after speaker nationally. Through the National Network of Estate Planning Attorneys and the Wealth Institute of Washington, McClure works with professionals in every state to assist their clients in solving problems and enhancing planning.

Christopher P. Hill, Founder of http://www.funeralresources.com

President Obama’s Tax Proposal, Expiration of the Bush Tax Cuts

Pay Lower Taxes Now…Higher Taxes Later

Obama’s Tax Proposals.

Many will pay lower taxes now and higher taxes later whether or not President Obama’s Fiscal Year 2011 Revenue Proposals (translated: tax changes) becomes law. Outlined in generalities in more than 150 pages, President Obama proposes tax increases and tax decreases for businesses and individuals and many complex provisions whose precise impact and details will not be known for years.

Increases for Higher Income Tax Payers.

Overall, the revenue changes produce a net increase in tax revenue to the federal government from 2011 to 2020 of $1,103,250,000,000 dollars. Of this, $969,467,000,000 or almost 88% of the new tax revenue comes from upper income individuals. This is done by exempting high income tax payers from the Bush tax cuts set to expire at the end of this year. The President proposes to reinstate the maximum rate of 39.6% on earned income from the Clinton administration as opposed to the 35% rate under the Bush tax cuts. This maximum rate would apply to taxable incomes over $373,650 for married persons filing jointly and single fliers. This 39.6% rate is projected to produce about a third of the new revenue to come from the increase of taxes on upper income people. There will be a top 36% rate, up from 33%, which will apply to married filed jointly with $250,000 of annual income (less the standard deduction and two personal deductions) and $200,000 for single filers, less the standard deduction and one personal exemption.

In addition, for the $250,000/$200,000 income and above group, there will limitations on itemized deductions, phase out of the personal exemption, a 20% capital gains rate and limitation of the value of a deduction to a maximum of 28%. These items raise $642 billion over the next ten years, the other two thirds of the new $970 billion of revenue from upper income tax payers. Many people who think that they will not be in the $250,000/$200,000 brackets will be shocked when they find that when they sell real estate or stocks at a profit that this could move them into these brackets in the year they make these sales.

Extension of the Bush Tax Cuts.

In a short paragraph on page 147 of the Revenue Proposals, President Obama proposes an extension of the Bush tax cuts for those below the $250,000/$200,000 and above brackets. As promised by him during his campaign, he said he would not raise taxes on the middle and lower classes. This extension of the Bush tax cuts, together with indexing of the Alternative Minimum Tax, will cost about $3.8 trillion of lost revenue over 2011-2020, or a loss of nearly four times the revenue increase from all of the other provisions in the 146 pages before the one page on the AMT and the Bush tax cuts. The largest item is a revenue loss of about $1.6 trillion resulting from the Bush tax cuts for middle and lower income tax payers. The Bush tax cuts took millions off of the tax roles and provided large tax rate reductions for lower and middle income earners; President Obama plans to continue these tax breaks. This results basically in an income transfer of about $970 billion from upper income taxpayers and $2.8 trillion from government deficits to middle and lower income taxpayers of about $3.8 trillion over ten years.

Will it Pass?

Congress will have their own ideas about tax changes and there is a lot of talk about an omnibus tax bill. Such a bill will have tax increases, tax loopholes, closing of tax loopholes and hundreds of pages of nearly indecipherable tax talk. Republicans will probably vote as a block against the bill as a “tax increase” and the Republicans who vote for it will fear a tea party challenger in their Republican primary. Many Democrats will worry about reelection if they vote for a large tax increase. Of course, the fear of voting for a tax increase ignores that the President’s proposal is really the continuation of the Bush tax cuts for most people and these large tax cuts contribute substantially to the increasing deficit.

Best Guess.

The bigger the tax bill, the more likely it will fail. From the standpoint of the budget deficit, if Congress is not able to agree on a tax bill in 2010, then the Bush tax cuts will expire at the end of 2010 and in 2011 and thereafter, there will be a huge increase in projected federal revenue. Unless there is a substantial decrease in the rate of increase in federal spending and a boom in the economy, the Bush tax cuts can not be sustained. Members of Congress can point out that they voted against the proposed tax increase bill. My best guess, based upon years in politics, is that no major tax bill will pass this year and the Bush tax cuts will expire at the end of the year.

Action Item.

Whether the President’s proposals pass or the Bush tax cuts expire, you will be paying a lot more taxes in the future. If you have capital gains or income over which you have the option to be taxed in 2010, it may be a good bet to pay taxes now, rather than later. This is completely different from the usual advice that it is best to postpone paying taxes. Contact us and we will assemble your team of advisors to implement a tax strategy designed around your needs.

Need Advice or Help at No Cost? 

If you would like to discuss any these details (or other estate planning matters) at no cost, contact our Preferred Provider for Funeral Estate Planning suppport.  Roger McClure, at (571) 633-0330 or visit  http://www.wealthcounsellors.com.  Roger can help you go over whether your plan is up to date, uses all of the new exemptions and how you can take advantage of current rules.  Here is some information about Roger:

Roger McClure is a practicing attorney with over thirty years experience. He maintains a business, estate and charitable planning law practice based in Virginia.  His undergraduate degree is in international Studies and he holds a Masters Degree in Political Science from Northwestern University and a Juris Doctorate with honors from the Ohio State University Law School.

McClure has conducted civil and criminal trials in local courts, represented creditors in bankruptcy proceedings, and litigated antitrust and trade regulation cases involving the largest corporations in America in federal regulatory proceedings. He served ten years in the Virginia legislature (House of Delegates), has been a radio talk show host, received a bronze star for service in Vietnam, and has written and published several books and numerous articles.

He is a sought after speaker nationally. Through the National Network of Estate Planning Attorneys and the Wealth Institute of Washington, McClure works with professionals in every state to assist their clients in solving problems and enhancing planning.

Christopher P. Hill, Founder of http://www.funeralresources.com

One Way to Avoid New Death Taxes on Real Estate in 2010

Using Section 1031:  

Tax – Deferred Exchanges For Real Estate

In our recent blogs and articles we have shown how for many families, the new death tax in 2010 will cause families to pay more taxes when someone dies in 2010 that they would have paid in 2009. This is because in 2010, there is no step up in basis for property received from a decedent, except for the $1.3 million and marital exemptions.

Home Occupancy Exemption

In the past, a person could exclude up to $250,000 from the profit on the sale of their principal residence if they lived there two of the last five years from the date of sale. What is new in 2010 is that the heirs of the decedent can use this $250,000 exemption even though they did not live there.

Example: Dr. Sam’s $250,000 exemption. Dr. Sam bought his house in 1981 and paid $100,000. Over the years, Dr. Sam made $100,000 of improvements. If Dr. Sam had sold his house for $950,000, his taxable gain would have been calculated this way: Determine what Dr. Sam paid for the house ($100,000) plus his documented improvements ($100,000), giving him a basis of $200,000. You deduct from his $950,000 sales price his $50,000 of sales expenses (real estate commission, settlement expenses and seller concessions) to determine net sales proceeds of $900,000, giving him a taxable profit of $700,000. You multiply the $700,000 profit times his estimated combined federal capital gain and state taxes of 20% times $700,000, for a total tax of $140,000 ($700,000 times.20 equals $140,000).

However, since Dr. Sam lived there two of the last five years, Dr. Sam gets a $250,000 exemption from this tax on the sale of his principal residence so that his taxable gain is $450,000 for a combined estimated tax of $90,000, giving him a tax savings of $50,000.

Example: Sally Inherits the $250,000. If Dr. Sam had died in 2009, his house would have received a “step-up” in basis to $950,000, the value at the date of his death in 2009 and his daughter Sally could have sold his residence for $950,000 and paid no federal or state capital gain (assuming state law is the same as federal law). But, with step up in basis gone in 2010, Sally receives the property at its basis of $200,000 and would have to pay the full $140,000 of taxes if she sold it, unless she uses part of the $1,300,000 exemption.

However, there is a special exemption in the new 2010 law that allows Sally to use Sam’s $250,000 exemption even though Sally never lived in the property. If Sally does live there for a while, Sally’s time of residence gets tacked on to Dr. Sam’s time of residence.

Section 1031 – Tax Deferred Exchange Beats Death Tax

In addition, real estate has another tax break that is not available for stocks and bonds and has only a narrow application for gold. Under Section 1031 of the US tax code, owners of real estate can complete a qualified tax deferred exchange (trade) of their old rental or business real estate for a new (to them) piece or pieces of rental or business real estate and defer indefinitely any gains.

The reason 1031 provides for a deferral of gain is that when doing a 100% exchange, the seller of the property never has the right to receive any cash and therefore has not taken any money out of the investment and has only continued her investment in real estate. However, when the investor cashes out, then the investor has to pay the deferred gain from all of the predecessor properties which were exchanges.

Example: Dr. Sam’s Rental Property. Dr. Sam had bought a modest home in 1972 on Main Street for $40,000. When he bought his new residence, he didn’t sell his Main Street home, but kept it over the years as a rental property. Dr. Sam deducted his depreciation on the Main Street rental property so that his basis was reduced to $10,000 when he died in 2010. With the Main Street property now being worth $500,000, Sally could pay nearly $100,000 in taxes if she sold Main Street after inheriting it from Dr. Sam with a basis of $10,000 ($490,000 times.20 equals $98,000 of taxes).

Since Main Street is rental property, there is no $250,000 exemption for it, but it is eligible for a 1031 exchange. Sally believes that she could make more money by exchanging Main Street for other real estate. She completes a qualified tax deferred exchange of Main Street and defers all of the gain on Main Street, thereby having almost $100,000 more available to provide her income from the new properties. Under 1031, Sally can continue to do this for the rest of her life and pass these properties on to her children. She could eventually exchange into a very nice house which she later uses (after a period of rental use) as her home. She could exchange into properties where she has virtually no management headaches and a solid income guaranteed by a large national corporation.

Post Mortem Planning

As you can see, there are lots of ways heirs can reduce the impact of the new Death Tax. Since federal capital gain rates are very likely going up, you have to investigate whether a tax deferred exchange makes sense. If you are an heir of property in 2010, make certain that you consult well informed tax, legal, accounting and financial planning professionals to avoid costly mistakes.

Need Advice or Help at No Cost? 

If you would like to discuss any these details (or other estate planning matters) at no cost, contact our Preferred Provider for Funeral Estate Planning suppport.  Roger McClure, at (571) 633-0330 or visit  http://www.wealthcounsellors.com.  Roger can help you go over whether your plan is up to date, uses all of the new exemptions and how you can take advantage of current rules.  Here is some information about Roger:

Roger McClure is a practicing attorney with over thirty years experience. He maintains a business, estate and charitable planning law practice based in Virginia.  His undergraduate degree is in international Studies and he holds a Masters Degree in Political Science from Northwestern University and a Juris Doctorate with honors from the Ohio State University Law School.

McClure has conducted civil and criminal trials in local courts, represented creditors in bankruptcy proceedings, and litigated antitrust and trade regulation cases involving the largest corporations in America in federal regulatory proceedings. He served ten years in the Virginia legislature (House of Delegates), has been a radio talk show host, received a bronze star for service in Vietnam, and has written and published several books and numerous articles.

He is a sought after speaker nationally. Through the National Network of Estate Planning Attorneys and the Wealth Institute of Washington, McClure works with professionals in every state to assist their clients in solving problems and enhancing planning.

Christopher P. Hill, Founder of Funeral Resources

3 Steps To Avoiding Death Taxes

Update Your Estate Plan

Take Advantage of 2010 Changes

New Set of Death Taxes.

For one year, 2010, there is a new death tax. In 2010, there is no estate tax or generation skipping tax that is paid by your estate. Instead, there is the abolition of step up in basis for one year.  For most single widows and widowers with money, this change means that there will be higher taxes imposed on their heirs than was true in 2009 when there was an estate tax (click here for last weeks blog). And, the exemptions for the step up in basis tax require different estate plans than the ones that worked prior to 2010.  Since most estate planners thought this would never happen, our informal survey shows that the estate plans of most people have to be changed and changed immediately to comply with the new law.

The New Death Tax. 

For 2010 only, when someone dies who is a US citizen or resident, the heirs of the decedent take the same “basis” in the property as the person who died or the value at the time of death, whichever is lower. Example: Dr. Sam bought 1000 shares of Google stock when it was $100 and when Dr. Sam died in 2010, Google shares were selling for $600 a share, for a gain of $500,000. If Sally, Dr. Sam’s daughter and heir, sells those 1000 shares she will have to pay the capital gain on those shares, which would be $500,000 times an estimated combined federal and state tax of 20% or about $100,000. If Sally waits to sell the shares in 2011, when the combined federal and state capital gain rate may be 35% or higher, Sally would pay $175,000 or more in taxes on just the Google stock.

First Step: Gather Those Receipts. 

Your first step in 2010 estate planning is to gather in a folder and have someone scan and put in computer storage, everything that proves what you paid for your assets and all improvements you have made on your residence.  For estates over $1.3 million, the executor has to report data to the IRS so that the IRS can check up on the taxes the heirs report when they sell the assets they inherited.

Step Two:  Capture the $1.3 Million Exemption.

For everyone dying in 2010, there is a $1.3 million exemption that your heirs get to add to the tax basis of the property you owned at your death. This means for most Americans, they do not have to worry about this step up in basis problem because they have less than $1.3 million in their estate.  This $1.3 million applies to property in revocable trusts or passed by will or without a will. But, it will not apply to assets you gave away or are in irrevocable trusts you do not own. 

Step Three:  The Big Prize: $3,000,000 Exemption. 

If you are married, your spouse can have $3,000,000 worth of property exempt from the no step up in basis rule. In 2009, five years after his wife died, Dr. Sam went to a high school reunion, saw Daisy, his high school sweetheart for the first time in 40 years, and they married three months later.   Dr. Sam’s estate is worth $5 million, with a basis of $1 million and therefore potentially $4,000,000 is subject to taxes when inherited and sold by Sally.  Dr. Sam updates his estate plan and sets up a trust so that when Dr. Sam passes away, $2.3 million goes to Sally in an asset protected trust and $2.7 million goes to Daisy in a trust that pays Daisy only the income for her lifetime. After Daisy passes away (she is 84), the balance goes to Sally. No estate tax because there is none in 2010. Sally has Dr. Sam’s receipts to show the $1,000,000 in basis and Sally receives the $1.3 step up in basis for the $2.3 million she receives in trust. The $2.7 million in trust for Daisy gets a full step up because it uses the $3,000,000 spousal exemption of Dr. Sam. The executor assigns assets that have no basis or have declined in value to the Daisy trust.  Dr. Sam’s assets can be liquidated into cash after his passing and there is no federal or state income taxes (assuming the state follows the federal rules and no retirement accounts which generate taxes).

What If Dr. Sam Remarries But Does Not Update his Estate Plan?  

Alternatively, Dr. Sam does not know the law has changed or chooses not to update his estate plan. He left everything in his plan to Sally and nothing to Daisy. Sally is only able to find documentation of the basis of Dr. Sam of $500,000. Sally’s basis in the Dr. Sam’s property is $500,000 plus the $1,300,000 exemption for a total of $1,800,000, leaving $3,200,000 of Dr. Sam’s estate subject to capital gains taxes to be paid by Sally of about $640,000 or higher in later years.  

What If Dr. Sam Does Re Do His Plan but they Live Together?

As a third example, if Dr. Sam and Daisy lived together and did not get married, even if Dr. Sam left $2.7 million in trust for Daisy, the trust for Daisy would not qualify for the $3,000,000 exemption because they were not married. Daisy or Sally has a large tax bill when they sell assets.  There has been a national trend of more unmarried households. The 2010 tax rules may result in more marriages; there is now a $3,000,000 penalty for not being married. 

Plan Now.

It is time to redo your plan to make sure it reflects what you want and your plan is current with the current law.  Many estate advisors thought this day would never come and they now say that Congress will change the law retroactively and wipe out the step up in basis problem in 2010. But, Congress has not solved this problem since 2002 and you should not depend on Congress to do your planning for you.

Need Advice or Help at No Cost? 

If you would like to discuss any these details (or other estate planning matters) at no cost, contact our Preferred Provider for Funeral Estate Planning suppport.  Roger McClure, at (571) 633-0330 or visit  http://www.wealthcounsellors.com.  Roger can help you go over whether your plan is up to date, uses all of the new exemptions and how you can take advantage of current rules.  Here is some information about Roger:

Roger McClure is a practicing attorney with over thirty years experience. He maintains a business, estate and charitable planning law practice based in Virginia.  His undergraduate degree is in international Studies and he holds a Masters Degree in Political Science from Northwestern University and a Juris Doctorate with honors from the Ohio State University Law School.

McClure has conducted civil and criminal trials in local courts, represented creditors in bankruptcy proceedings, and litigated antitrust and trade regulation cases involving the largest corporations in America in federal regulatory proceedings. He served ten years in the Virginia legislature (House of Delegates), has been a radio talk show host, received a bronze star for service in Vietnam, and has written and published several books and numerous articles.

He is a sought after speaker nationally. Through the National Network of Estate Planning Attorneys and the Wealth Institute of Washington, McClure works with professionals in every state to assist their clients in solving problems and enhancing planning.

For Many with Money, the 2010 Temporary Repeal of the Estate Tax Will Actually Increase their Death Taxes

Beware of TV Commentators

A TV financial commentator made the morbid comment this weekend that 2010 is the year to die because there is no federal estate tax in 2010. What he ignored is that the arcane tax law provides that for many with money in 2010, they will actually pay more taxes with the repeal of the estate tax if they die in 2010. So, if you are single or in a second marriage, have between $1.3 and $3.5 million, don’t use dying in 2010 as a tax planning strategy.

Temporary Repeal

Under current law, effective January 1, 2010, the federal estate tax is repealed until January 1, 2011, when the federal estate tax returns with a vengeance with a tax on everything above $1,000,000 and up to a 55% rate. There is legislation pending which would bring back the estate tax in 2010 with an exclusion of $3.5 million for 2010 and the next several years. Congress will probably try to reinstate the estate tax retroactively to January 1, 2010, making the pull the plug strategy for 2010 even a worse idea.  More on that in a future blog.  The federal estate tax is a tax on the estate of everything above the exclusion amount, except that bequests to your spouse and to qualified charities are federal estate tax free.  Also, many states still have an estate tax and some have an inheritance tax.

Step Up in Basis Is a Big Deal

Before 2010, if someone died, their heirs received their property at the market value of the property as of the date of death of the decedent, or an alternate date. In tax talk, this means their “basis” in the property increased and was “stepped up” to current market value.

Dr. Sam Dies BEFORE 2010: No Death Taxes

Dr. Sam (a widower) bought a house in the suburbs for $100,000 which is now worth $900,000. The basis of Dr. Sam in his house is $100,000 (what he paid of it in 1981), plus another $100,000 in improvements, for a total basis of $200,000. If Dr. Sam sold his house for $900,000 and assuming it is eligible for the $250,000 homeowner exemption from capital gain taxes, his taxable gain is $900,000 less his basis of $200,000 less homeowner exemption of $250,000 or $450,000 in total ($900,000-$200,000-$250,000 =$450,000). Dr. Sam’s capital gain tax is a combined federal and state rate of about twenty percent (20%) times $450,000 or $90,000. If Dr. Sam had died in 2009, his daughter and sole heir Sally Sue would have received an increase in Sally Sue’s basis to $900,000, the market value of the house as appraised in the estate of Dr. Sam. Therefore, Sally Sue sells the house for $900,000 after expenses and because her basis was “stepped up” to the value in Dr. Sam’s estate, Sally Sue pays no capital gains because Sally’s stepped up basis is the same as what she sold it for. If Dr. Sam’s estate was less than $3.5 million, his estate pays no estate taxes.

Dr. Sam Dies DURING 2010: $160,000 in Capital Gains Taxes

As a way of raising tax money to replace the revenue “lost” from the repeal of estate taxes, Congress also repealed step up in basis for property received from a decedent.  So, if Dr. Sam died in 2010, when there is no step up in basis, Sally Sue receives the basis for Dr. Sam’s house of $100,000, assuming Sally Sue found proof of the $100,000.  Sally Sue is very unlikely to find the receipts of Dr. Sam to prove that Dr. Sam made $100,000 of improvements. Sally Sue has not lived in the house and the five year period to qualify for the homeowner residence deduction of $250,000 has expired. Sally Sue’s capital gain in 2010 is $900,000 less $100,000 which is $800,000 ($900,000-$100,000=$800,000). With an estimated 20% combined federal and state rate, Sally Sue pays $160,000 in taxes on the sale of Dr. Sam’s house in 2010 if the house is not covered by the $1.3 million exemption.  Sally Sue may experience a $160,000 tax increase due to the one year repeal of the estate tax.

Paper Chase Harassment

Sally Sue has the paper chase harassment of trying to find proof of what Dr. Sam paid for his house in 1981, what he paid for his Microsoft stock in 1982 and what grandmother paid for the family cabin in 1932 before she gave it to Dr. Sam. Finding proof of the basis in assets of a decedent will be very difficult. Sally Sue will have to document her claims of her basis to the IRS. The title companies, the stock brokerage companies, and most of the public will go crazy trying to figure out what parents, aunts, and uncles paid for things during their lifetime. But the anal record keeper gets to finally say with glee: “See, I told you never to throw out those papers from the thirties”.  

Exceptions & Exemptions

Of course, it would not be the American tax law unless there were exemptions and exclusions. There is a $1.3 million allowance for a step up in basis and an additional $3,000,000 spousal exemption. For people who are not US citizens or US residents with investments in the US, the exclusion is only $60,000. The net effect of this is that if you are single or married with an estate plan that does not capture the spousal exemption, you still have a death tax in the form of future capital gains for your heirs and your exemption is no longer $3.5 million as it was in 2009, but only $1.3 million plus proof of your basis in assets not covered by the $1.3 million. Since many people are widowed when older and most don’t have estates greater than $3.5 million, 2010 is the year when the taxes to be paid by their heirs on their inheritance increased up to $440,000.

Utilize Our Preferred Provider – UPDATE YOUR ESTATE PLAN TODAY!

Will your estate plan survive 2010?  In the estate plans we have been doing in the last several years, the 2010 temporary repeal is covered. But, many other plans do not cover this. There are new planning opportunities to take advantage of this one year repeal of the estate tax. 

If you would like to discuss any these details (or other estate planning matters) at no cost, contact our Preferred Provider for Funeral Estate Planning suppport.  Roger McClure, at (571) 633-0330 or visit  http://www.wealthcounsellors.com.  Roger can help you go over whether your plan is up to date, uses all of the new exemptions and how you can take advantage of current rules.  Here is some information about Roger:

Roger McClure is a practicing attorney with over thirty years experience. He maintains a business, estate and charitable planning law practice based in Virginia.  His undergraduate degree is in international Studies and he holds a Masters Degree in Political Science from Northwestern University and a Juris Doctorate with honors from the Ohio State University Law School.

McClure has conducted civil and criminal trials in local courts, represented creditors in bankruptcy proceedings, and litigated antitrust and trade regulation cases involving the largest corporations in America in federal regulatory proceedings. He served ten years in the Virginia legislature (House of Delegates), has been a radio talk show host, received a bronze star for service in Vietnam, and has written and published several books and numerous articles.

He is a sought after speaker nationally. Through the National Network of Estate Planning Attorneys and the Wealth Institute of Washington, McClure works with professionals in every state to assist their clients in solving problems and enhancing planning.