Category Archives: Estate Planning

Estate Planning Facts. Last Will and Testaments versus Living Trusts. Estate Taxes. Gift Taxes. Inherited IRAs. Guardians for minor children. Pet Trusts. Funeral Agents. Avoiding Probate. Get Your Affairs In Order.

25 Documents You Need Before You Die

Recently, the Wall Street Journal weekend edition had a very interesting article titled “25 Documents You Need Before You Die.”

Basically, it says that you should make sure that the originals of all of your valuable papers are put somewhere safe and that a loved one knows where that safe place is. Otherwise, when you become incapacitated or after you die there may be a great deal of frustration and unnecessary work as your heir or estate representative tries to figure out what you’ve done and how to prove it.

Check out this article and also check out Die Smart for more information on what to do.

What will happen to the poor little rich dog’s ashes?

When Leona Helmsley died, she left $12 million in her will allocated to the care of her beloved Maltese lapdog, Trouble. In 2008, after some of Helmsley’s heirs protested, a judge reduced Trouble’s inheritance to a mere $2 million, saying that $12 million exceeded the amount necessary to care for the dog, even when providing her with the highest standard of care.

Helmsley also specified in her will that Trouble ‘s remains were to be buried alongside her own in the family mausoleum which is located in the Sleepy Hollow Cemetery in Westchester County, New York. That request has not been honored and Troubles ashes remain “privately retained.”

Regulations prohibit the interring of nonhuman remains at a human cemetery. However, the Helmsley mausoleum itself is considered private property (even though it is located on the cemetery grounds) and its key is retained by the Helmsley family.

Should the family will skirt the law and bury Trouble’s ashes alongside those of Leona Helmsley? What would you do?

You thought you could be buried with your pet…maybe not in New York.

Many people consider their pet a member of the family and, when it dies, they want to remember that pet by burying it in a special place.

Hartsdale Pet Cemetery and Crematory in Hartsdale, New York claims to be the oldest pet cemetery in the United States and, until recently, it allowed people to have their ashes buried next to those of their pet. After all, some people are closer to their dogs or cats than they are to other members of their family so it makes sense that they would want to be near them after death.

However, last February, the New York Division of Cemeteries announced that this was no longer possible and has since blocked Hartsdale from taking in human ashes. The government claimed that Hartsdale has been violating a law requiring that any cemetery providing burial space for humans must be operated as a not-for-profit corporation. By charging a fee and promoting their human interment service, Hartsdale was violating laws governing not-for-profit corporations.

According to a spokesperson for Hartsdale, it is a private, for profit business and, as such, is not under the jurisdiction of the Division of Cemeteries.

Until the law is clarified and a final decision made, people like Taylor York, a law professor, are out of luck. York’s uncle, Thomas Ryan, died in April and had arranged, and prepaid, to join his wife, Bunny and their two dogs, BJ I and BJ II, who are already buried there. Now Ryan’s ashes sit in a wooden box at his sister’s home because the state’s new rule won’t allow him to be buried at Hartsdale.

What do you think? Pet’s ashes are not allowed to be buried in a human cemetery; should people’s ashes be allowed to be buried with their pets in a pet cemetery?

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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