Author Archives: Kathy Lane

Estate Planning and Family Feuds

Family feuds and estate planning were an oxymoron in the 50′s and 60′s.

The family consisted of a mother, a father, and children who shared the same mother and father.     Whether someone died with or without a will, the results were usually the same.     If the spouse made a will, they named the surviving spouse and the children as beneficiaries.   If a spouse died without a will, state intestate laws named the surviving spouse and the children as beneficiaries.

People died fast.    There were no caregivers or need to pay for long term care from family resources.

Fast forward to today. According to a recent USA article: Blended families are now the norm.   “More than half of all first marriages end in divorce and about 75% of divorced people will marry again, according to the National Stepfamily Resource Center. About 65% of these unions will include children from previous marriages. More than 40% of American adults have at least one step-relative, according to a Pew Research Center study earlier this year.”

If you are part of a blended family, dying with or without a will may not provide the results you want for children from a prior marriage.   If your surviving spouse dies without a will, state intestate laws do not provide for step children.     The parents or siblings of your surviving spouse will inherit any property you gave to a surviving spouse before state intestate laws grant any inheritance rights to your children from a first marriage.      If you think a surviving spouse has provided for your children from a first marriage in their will, remember a will is a revocable document.   A surviving spouse has the right to change a will after you die and give property you intended to be left to your children from a first marriage  to his or her children from another marriage.

We no longer die fast.     As we age, we lose our ability to manage our own affairs.    Our children are often our caregivers.    A caregiver may believe they deserve more than other siblings for taking care of their parents.

In a recent conversation with an estate planning lawyer, we talked about the growing demand for estate planning lawyers with litigation experience.   He explained families usually fight for two reasons.  The siblings fight because they believe the caregiver doesn’t deserve any special treatment.  The children from a first marriage and a surviving spouse from a second marriage fight because the children want to protect their future inheritance.

Who Owns Your Digital Assets When You Die

Digital assets are making dying even more complicated.    As more and more of our life is portrayed in a digital form, a key question is evolving in the legal community:   “Who Owns Your Digital Assets When You Die?”

The  New York Times posted an interesting article regarding your digital assets,   “Cyperspace When You Are Dead.”

Today, there are no common policies or laws covering the disposition of your digital assets when you die.    In fact, each Internet Service Provider sets their own policy.    Google is different than Facebook.   Facebook is different than Yahoo.   In some instances, businesses may find they can’t get access to hosted accounts because someone doesn’t leave behind their passwords.   You can find out the policies regarding your digital assets at Google, Facebook, Twitter, Yahoo, Comcast, etc. at diesmart.com.

2010 Tax Relief Act: Estate Tax Update

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2010 Tax Relief Act:  Federal Estate Tax Provisions

On December 16, 2010 Congress passed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.   Section III of the bill is titled “Temporary Estate Tax Relief”.

Section III gives instructions on how estate representatives should calculate and pay estate taxes for decedents who die in the years 2010, 2011 or 2012.

IF YOU DIE IN THE YEAR 2011 OR 2012

The 2010 tax relief act provides:

  • The federal estate exemption allowance for a single person is $5 million.
  • Married couples can pass $10 million of assets to their heirs free of estate taxes by the use of a new estate tax form referred to as the Deceased Spouse Unused Exclusion Amount (DSUEA)
  • The maximum estate tax rate is 35%.

Q.    Why should married couples care about the Deceased Spouse Unclaimed Exclusions Amount form?

A   Before the 2010 Tax Relief Act created the DSUEA form, the only way a married couple could preserve the estate tax exemption allowance of the first spouse to die was to spend time and money in setting up an A/B trust.

The surviving spouse of someone who dies in the year 2011 or 2012 can now just file  Form 706 with the Internal Revenue Service and claim the right to the  deceased spouse unclaimed exclusion amount.   When the surviving spouse dies, his or her estate representative can combine the last spouse to die $5 million personal estate tax exemption allowance with the first spouse to die deceased spouse unused exclusion amount.

The ability to transfer the estate tax exemption to the surviving spouse is sometimes referred to as portability.  The net effect is it gives married couples the right to exclude $10 million of assets from federal estate taxes.

Q.   Can domestic partners take advantage of DSUEA?

A.   No.    The existing Defense of Marriage Act limits federal benefits to a traditional husband and wife.

Q.   Can the new DSUEA benefit help if a spouse died several years ago?

A.    No.   The ability to use the new DSUEA only applies to someone who dies after December 31, 2010.

Q.   Is portability automatic?

A.   No.   The surviving spouse or someone responsible for settling the estate of the deceased spouse MUST file Form 706 estate tax return with the IRS and claim the deceased spouse unused exclusion amount, even if no tax is due.    The 706 estate tax return must be filed nine months after death but you can apply for a 6 month extension.  The IRS is expected to create a short Form 706 to make it easier to file and claim the DSUEA.

Q.   What if the Form 706 is not filed?

A.   If the estate of the deceased spouse does not file Form 706, the surviving spouse loses the right to portability.

Q.   Should a surviving spouse file Form 706 if the estate is not subject to estate taxes?

A.    Yes.   If the executor doesn’t file the Form 706 estate tax return or misses the filing deadline, the surviving spouse loses the right to portability.  Spouses should file Form 706 even if they’re not wealthy today.   Who knows the future.   The surviving spouse might win the lottery!

Q.    Is the amount of the deceased spouse exclusion amount adjusted for inflation?

A.  No.

Q.   Will the amount of the individual $5 million tax exemption allowance be adjusted for inflation?

A.  Yes.

Q.   What happens if the surviving spouse remarries?

A.    If a surviving spouse remarries, the surviving spouse must use the DSUEA of the new husband, even if the unused exemption of the new husband is less than the unused exemption of a prior husband.

Q.    Does a married couple still need an A/B  trust?

A.   Married couples no longer need an A/B trust to preserve the federal estate tax exemption of the first spouse to die.    Since the DSUEA is not adjusted for inflation, an A/B trust may still be useful in protecting the appreciation of the first spouse to die assets placed in Trust B.

An A/B trust may also be beneficial if someone wants to protect assets from creditors or protect an inheritance for children from a prior marriage.

2010 Portability Examples:

Example 1:   DSUEA not available.

John and Mary owned assets with a taxable value of $8 million.  John died unexpectedly in 2010 and had not created a will or an A/B trust.   Mary, the surviving spouse, inherited John’s share of the marital assets.  Mary could not file and claim a DSUEA because portability was not available in the year 2010.

Mary dies in 2012.   Estate taxes will be due on $3 million, the value of the estate exceeding Mary’s $5 million estate tax exemption allowance.

Example 2:   DSUEA is available.

John and Mary owned assets with a taxable value of $8 million.  John died unexpectedly in 2010 and had not created a will or an A/B trust.   Mary, the surviving spouse, inherited John’s share of the marital assets.  Mary filed a timely Form 706 estate tax return and elected to claim John’s unused exemption amount.

Mary dies in 2012.   No estate taxes are due, as Mary’s estate excluded $10 million of assets by combining Mary’s $5 million exemption allowance with John’s $5 million exemption allowance.

Example 3:   Surviving spouse remarries.

John and Mary owned assets with a taxable value of $8 million.  John died January 1, 2011.  Mary, the surviving spouse filed a timely Form 706 estate tax return and elected to claim John’s unused $4 million exemption amount.

Mary marries Jim in December 2011.

Jim dies in June, 2012.   Mary files a Form 706 claiming a $2 million DSUEA for Jim.

Mary dies in December, 2012.   Mary’s estate can use and combine Mary’s $5 million estate tax exemption and Jim’s $2 million DSUEA.

If  Mary remarries before she dies, the DSUEA of a prior spouse is replaced with the exemption allowance of the most recent spouse.

Example 4:  A/B trust present

John and Mary owned assets with a taxable value of $10 million.  John died in 2010 and left instructions to place his $5 million share of the marital assets in Trust “B”.   One of the assets John owned was shares in a start up valued at $2 million when he died.

When Mary dies in 2012, the company John had invested in had been sold and the value of the shares in Trust “B” is now $8 million.     Because the assets in Trust “B” are no longer considered assets owned by Mary, Mary’s estate does not need to include the value of the assets in Trust “B” as part of Mary’s taxable estate because the assets are owned by Trust “B”.

The use of an A/B trust rather than the use of a DSUEA form protects any appreciation in the assets of the first spouse to die.

IF YOU DIED IN THE YEAR 2010

There are two different estate tax laws governing the estates of someone who died in the year 2010.

2001 Economic Growth and Tax Reconciliation Act (EGTRRA)

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). The EGTRRA contains estate tax laws governing the estates of someone who died in the years 2002 through 2010.

In 2010, EGTRAA eliminated the estate tax.   The estate did not need to calculate or pay any estate tax.   As such, there was no 2010 estate tax rate or 2010 estate tax exemption allowance.   No estate tax was paid before distributing assets to the beneficiaries.

Since the estate was no longer responsible for paying taxes before distributing assets to the beneficiaries, EGTRRA changed how beneficiaries calculate the tax basis of inherited assets.

Prior to 2010, the tax basis for beneficiaries was a “stepped up basis”.  The step up in basis establishes the tax basis for beneficiaries as the fair market value of the asset on the date of death of the decedent.

In the year 2010, EGTRAA changed the tax basis for beneficiaries to a carryover basis.   The carryover basis establishes the tax basis for beneficiaries as the original cost basis of the decedent plus qualified improvements.    Each estate can exempt $1.3 million of gains from the carryover basis rule.  Another $3 million exemption applies to assets inherited from a spouse.  In order to comply with the new carryover basis rules, executors and beneficiaries need to document and report the sale of inherited assets to the Internal Revenue Service, using special forms.

2010  Tax Relief Act:

The 2010 Tax Relief Act created a $5 million federal estate tax exemption allowance and set the maximum estate tax rate at 35%, retroactive to January 1, 2010.   The beneficiary tax basis is a step up in basis value.

Which law governs the estate of someone who dies in 2010: EGTRRA?   Or the 2010 Tax Relief Act?

The 2010 Tax Relief Act gives the estate of someone who died in 2010 the right to choose which law to use.

The language in the 2010 Tax Relief law assumes the estate of someone who dies in the year 2010 will be subject to an estate tax and the tax basis for beneficiaries will be a step up in basis.    Since the 2010 tax exemption allowance is $5 million, very few estates will actually need to file and pay estate taxes.   If estate taxes are due, the maximum tax rate is 35%.   No action is required by the estate to make this election.

If the estate elects to not pay any estate taxes and use the carryover tax basis for beneficiaries, the estate representative must file special forms with the Internal Revenue Service stating such intent.   Once this election is made by the estate representative, any change must be approved by the Secretary of Treasury or the Commissioner of  the Internal Revenue Service.  The form for making this election is not available today.

Example:   Beneficiary Carryover Tax Basis.

When her father died, Mary inherited the family residence.   On the day her father died, the fair market value of the house was $500,000.   Mary’s father purchased the house 20 years ago for $200,000.

Mary sold the house for $500,000.  Mary’s tax basis was $200,000, the original cost to her father.  Mary had to report and pay capital gains tax on $300,000.

The estate was not subject to any estate tax calculations.   There was no need for the estate representative to calculate or pay estate taxes before transferring the title of the real estate to Mary.

Mary’s tax basis remained the same as the decedent.  The estate representative elected to give other assets of the decedents the right to exempt $1.3 million of gains from the carryover basis rule.

Example 2:  Beneficiary Step Up In Value Tax Basis.

When her father died, Mary inherited the family residence.   On the day her father died, the fair market value of the house was $500,000.  Mary’s father purchased the house 20 years for $200,000.

Mary sold the house for $500,000.  Mary’s tax basis was $500,000, as the tax value was stepped up to the fair market value on the date of death of Mary’s father.  Mary reported a capital gain of zero dollars and owed no taxes.

The estate representative calculated and paid any estate taxes due if estate taxes were due; the estate paid the taxes before distributing inherited assets to Mary and other beneficiaries.

WHAT IF YOU DIE AFTER JANUARY 1, 2013

The recent 2010 Tax Relief Act temporarily extended the temporary reduction in estate taxes prescribed by EGTRRA.   The current estate tax laws expire on December 31, 2012 and revert back to the tax laws in existence in the year 2001.

Don’t let the new $5 million estate tax exemption allowance and the Deceased Spouse Unclaimed Exclusion amount fool you about the importance of planning for estate taxes.    State estate taxes and inheritance taxes did not go away…and they don’t provide generous exemptions or portability.   It is also unclear what will happen with any unused deceased spouse exclusion amounts after 2012.

SUMMARY OF ESTATE TAX LAWS:  2001 through 2013.

Year Personal Estate Tax Exemption Allowance Top Estate Tax Rate Deceased Spouse Unused Exclusion amount Tax Basis Applicable Tax Law
2001 $675,000 55% No Step Up In Basis Taxpayer Relief Act of 1997
2002 $1,000,000 50% No Step Up In Basis EGTRRA
2003 $1,000,000 49% No Step Up In Basis EGTRRA
2004 $1,500,000 48% No Step Up In Basis EGTRRA
2005 $1,500,000 47% No Step Up In Basis EGTRRA
2006 $2,000,000 46% No Step Up In Basis EGTRRA
2007 $2,000,000 45% No Step Up In Basis EGTRRA
2008 $2,000,000 45% No Step Up in basis EGTRRA
2009 $3,500,000 45% No Step Up In basis EGTRRA
2010 $0 0% No No Step up in Basis EGTRRA
OR OR OR OR OR
$5,000,000 35% No Step Up In Basis TTRA2010
2011 $5,000,000 35% Yes Step Up In Basis TTRA2010
2012 $5,000,000 35% Yes Step Up In Basis TTRA2010
2013 $1,000,000 55% No Step Up In Basis Taxpayer Relief Act of 1997

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Facebook.com/healthcare.gov and Long Term Care

The Health and Human Service Department has announced the launch of HealthCare.gov on Facebook.

If you visit healthcare.gov, you will find several tools that can help consumers make educated choices about their medical care.

One of the tools is titled “Nursing Home Compare”.     It provides a list of U.S. nursing homes which includes demographics (location and type of facility) and nursing home ratings, which include health inspection reports, staffing data and quality measures.

Another tool is called “Home Health Compare”.   The Home Health Compare tool can help you compare the quality of care that home healthcare agencies provides.

If someone you know needs help with long term care,  this information may be very useful.

This is also a go to site if you want to find more facts about ObamaCare.

You can join Healthcare.gov on Facebook at http://www.facebook.com/healthcare.gov.

Dying in the year 2010: Why Is It Different?

On January 1, 2010, the rules about taxing inherited asets changed.

To understand why dying in the year 2010 is different from dying in any other year, you must understand how inherited assets are taxed.

  • Unless someone dies in 2010, all of their heirs will inherit property with a “stepped-up basis.”    Stepped-up basis is an Internal Revenue Service term describing the tax basis of inherited property as equal to the fair market value of property on the date of death.   When inherited property is sold, the beneficiary uses the stepped-up basis to calculate and report capital gains.   If the sales price exceeds the stepped-up basis, the beneficiary reports the profit as a capital gain on his or her tax return and pays the necessary capital gains taxes. 
    • Example:  Sue inherited a house from her mother, who bought the house fifty years ago for $25,000.   On the day her mother died, the house had a fair market value of $500,000.  Sue sold the house six months later for $525,000.  Sue reported a capital gain of $25,000, the difference between the stepped-up basis and the sales price. 
  • Unless you die in 2010, the decedent’s estate is required to pay estate taxes if the fair market value of all the property on the date of death exceeds the federal estate personal tax exemption allowance for that year.  If estate taxes are due, the estate representative pays the estate tax and then distributes the remaining assets to the heirs.     
    • A surviving spouse receives an unlimited federal estate tax marital exemption.  No federal estate taxes are due, even if the fair market value of the inherited property exceeds the federal estate tax personal exemption allowance.  Any inherited property sold during the lifetime of the surviving spouse uses a stepped-up basis to calculate capital gains.   
    • Estate planning documents may include a reference to the federal estate tax personal exemption allowance as a way of reducing estate taxes or allocating assets between different trusts and beneficiaries.    They may determine how much a surviving spouse or child inherits. 
    • The federal estate tax rates for the year determine how much tax is due.

    What will be different if someone dies in the year 2010?

    In 2001, Congress passed a bill known as The Economic Growth and Tax Reconciliation Act of 2001.  Section V of this bill specifies how inherited assets are taxed between the years 2002 and 2011.

    Years 2002-2009
    For the years 2002 through 2009, the Act changed the amount of the federal estate tax exemption allowance as well as the federal estate tax rate.  

    • The federal estate tax exemption allowance increased from $1 million to $3.5 million.
    •  The federal estate tax rate decreased from 55% to 45%. 

    The Act resulted in fewer estates being subject to the estate tax and decreased the amount of taxes due for those estates that were subject to an estate tax.  Most important, the Act did not change the fundamental way in how inherited assets are taxed. 

    Year 2010  
    If you die in 2010, there is no estate tax.  There is no federal estate tax exemption allowance and no federal estate tax rate schedule. You could have an estate worth hundreds of millions of dollars and no estate tax is due.  The elimination of the estate tax does not mean there is no tax on inherited assets.  The Act requires the beneficiaries, not the estate representative, to calculate and pay taxes on inherited property using either a stepped-up basis or a carryover basis.   

    • The estate representative must calculate and document the carryover basis of inherited property.    The term “carryover basis” means the tax basis is the original cost paid for the property.   The greater the increase in value of the property between the date of purchase and the date the beneficiary sells inherited property, the more taxes a beneficiary pays.
      • Example.  Sue inherited a house from her mother, who bought the house 50 years ago for $25,000.   On the day her mother died, the property had a fair market value of $500,000.  Sue sold the house six months later for $525,000.  Sue reported a capital gain of $500,000, the difference between the carryover basis (the original price of the property) and the sales price. 
    • An estate representative must also calculate the stepped-up basis of the decedent’s property. 
    • The estate representative can only distribute a limited amount of assets using a stepped-up basis. 
      • $1.3 million can be distributed to beneficiaries with a stepped-up tax basis. 
      • $3 million of assets can be distributed to a surviving spouse with a stepped-up tax basis. 
      • All other inherited property must be distributed to beneficiaries using the carryover tax basis.
    • All beneficiaries must calculate and pay capital gains when they sell an inherited asset.  The estate representative will provide documentation the beneficiary can use to document on their tax return whether capital gains are calculated using a stepped-up basis or a carryover basis. 

    Year 2011
    If you die in 2011 or any year thereafter, the Economic Growth and Tax Reconciliation Act of 2001 is repealed.  The rules about estate taxes and the tax basis of inherited property revert back to the rules in existence in 2001.    Heirs inherit property and calculate capital gains using the stepped-up basis.  The federal estate exemption allowance reverts back to $1 million and the maximum estate tax rate reverts back to 55%.   

Summary
Because the rules on the taxation of inherited assets are so fundamentally different for someone who dies in 2010, no one thought Congress would allow the existing Economic Growth and Reconciliation Act of 2001 to remain in effect.  In December, the House voted to provide a permanent federal estate tax exemption of $3.5M and a maximum federal estate tax rate of 45%, effective January 1, 2010.   The Senate could not agree on what the amount of the federal estate tax exemption allowance and the rate of the estate tax should be and did nothing.  Senator Backus was quoted as saying it was not a priority within the Senate to change the existing 2001 legislation, but has implied he will make it a priority in 2010.

What does all of this mean if you die in 2010?

What began as a debate on how much wealth someone could pass on to their heirs free of estate taxes has evolved into a mess for everyone who dies in 2010, not just the wealthy.

  • Good records just became more important.  In order to calculate the carryover basis for inherited property, the estate representative will need to know the original cost of all of the property.   Just imagine documenting stock splits or the cost of a home bought fifty years ago.
  • Existing estate planning documents that make choices based upon the amount of the federal estate personal tax exemption allowance won’t work.  There is no federal estate tax exemption allowance in 2010.   You may accidentally disinherit a spouse or your children!
  • If the value of your estate exceeds $1.3 million, your estate representative will determine who inherits assets using a stepped-up basis or a carryover basis.  The unlimited marital tax exemption allowance does not exist for surviving spouses.  A surviving spouse may pay more in capital gain taxes during their lifetime if their spouse dies in 2010 than they would pay if he or she died in any other year.
  • It will be a tough year for estate representatives.  They must determine the intent of existing planning documents or existing intestate laws versus the need to follow the rules for taxing inherited assets in 2010.   It will be a good year for estate planning litigators. 

 
The Senate has stated it intends to pass new legislation with the intent to make the legislation retroactive to January 1, 2010.   Every day that passes without some type of resolution compounds the problem.  Do we need to change our estate planning documents?   What happens with software or web sites providing information about estate taxes?    Can we die retroactively?
If you know you won’t die in the year 2010, you may not want to call your financial planner or your estate planning lawyer.  Otherwise, it may be wise to call and get their advice and input on how to deal with the mess Congress has created for everyone.