Faced With Lengthening Debate On Health Care, Congress Puts Off Estate Tax Reform.
As I've written before, the Estate Tax, which taxes the estates of the richest taxpayers who die, was set to expire in 2011, due to action taken by the Bush Republican Congress in 2002. Congress could not balance the budget and pass a massive tax cut for wealthy Americans at the same time, so the tax cuts were set to expire by next year. Congress will now have to decide what if anything to do about them by that time or there will be no Estate Tax in 2010, and in 2011 the law will expire and the tax will revert to the way it was in 2001, with a $1 million exemption (estates worth less than $1 million would pay no tax).
Since this would hit lots of middle-class taxpayers who own property in expensive states like California or New York, it was considered virtually certain that Congress will act before then. "Experts and aides say a more realistic scenario involves Congress passing a one-year extension and then tackling the issue as part of broader tax reform next year" reports published in The Hill note. Allowing the tax to expire would provide a wind-fall to the ultra-rich who pay all of the tax under today's rules (the current exemption is $3.5 million and $7 million for a married couple), so allowing the tax to expire would blow another hole in the deficit, which Democratic lawmakers are eager to avoid (the government would lose $19 billion in revenues from allowing the tax to expire).
As with the Health Care Bill, the chief holdup seems to be Sen. Max Baucus, whose committee "hasn’t scheduled when it would consider new estate tax legislation. The panel is busy with the healthcare reform bill, which is likely to occupy the committee until October."
Why Should I Care?
While it is unlikely that Congress will allow the Estate Tax to hit middle class families by letting the law revert to what it was in 2001 (a $1 million exemption), Estate Planners will have to watch and see what develops.
Those with property worth at least $1 million (including real estate) should consider having an expert review your estate plan for tax implications. After all, Congress has screwed up before, and it's possible that there will be continued deadlock between Republicans and Conservatives who insist on a complete repeal of the Estate Tax (despite increasing the deficit), and Democrats who want to see the current rates continue.
One common sense solution that seems unlikely to pass is that proposed by Rep. Mike Thompson (D-Calif.), a Ways and Means Committee member, has proposed excluding family farms and ranches from the estate tax.
“When farms pass from generation to generation, too often families have to sell the farm to developers in order to pay the estate taxes,” Thompson said in a statement. “We need to preserve our farms and open spaces for the next generation.”
This reform would allow (working) family farms and ranches to be excluded from the tax. Combined with setting the tax to exempt estates worth less than $3.5 million would mean no middle-class taxpayers need ever worry about this tax; which is as it should be! The Estate Tax was designed to prevent the build-up of an aristocracy of un-earned wealth and privilege and was NEVER intended to catch middle-class taxpayers because of increases in real estate prices.
Saturday, September 26, 2009
Monday, April 27, 2009
If you have considered recently whether you need a will and estate plan you might want to remember the following:
Even small estates can often benefit from proper estate planning. Of course, if you have a taxable estate (in 2008 this may mean assets of more than $1,000,000) you should have an estate plan drafted by an experienced legal professional who knows the laws of your state (unless you just enjoy giving extra money to the government in taxes).* However, even for smaller estates, there are many situations you might not have considered where you and your business might benefit from proper estate planning.
Although there are many will documents out there on the web and do-it-yourself will kits, books and manuals, this is an area where there are many pitfalls for the unwary. Every state has different laws and they change periodically. A generic will or other documents may not work properly in your state or may not have the effect that you want them to, and no-one would ever know until the will is admitted to probate. Don’t leave your children or heirs with a big mess!
In Colorado you should consider the following:
* If you or your spouse have children by a previous marriage, you need a properly drafted will to make sure your assets are properly distributed at your death, so that such children are not inadvertently disinherited.
* If you are not married to your partner, you definitely need a will. Under the intestacy laws (for people who die without a valid will) the State of Colorado will inherit all your assets before your partner, who might have lived with you for years. This may not be at all what you intended! This especially applies to gay relationships which are not recognized under Colorado law.
* Generally speaking, while state probate laws are better than they once were they are still not tailored to unusual situations:
For instance, have you considered what happens if you or your spouse are disabled and not able to make critical medical and financial decisions? Who would you want to handle such matters? Normally, your spouse or family member must petition the court for an emergency temporary conservatorship or guardianship. This proceeding is expensive and can be time consuming. Worse, suppose you want your unmarried partner to make financial or medical arrangements rather than your parents or adult children? The law doesn’t recognize your partner’s rights. Who will have access to your bank accounts? Who will make important medical decisions? A durable medical and durable financial power of attorney, plus a Colorado living will can easily be drafted to handle such situations, but only before, not after an emergency! If you are unconscious for instance, you cannot sign legal documents! Then it will be too late and you or your family may be stuck with needless delay and thousands of dollars in unnecessary legal fees!
The important point to consider here is that proper planning empowers you! You make the decisions in advance instead of leaving critical decisions about your life to others, even family members!
Business and Succession Planning: Another area that can routinely benefit from proper estate planning is planning for your business. What happens if you or your business partner were to die or become seriously disabled, who would inherit there share of the business? Have you got key person insurance to handle the distribution of assets to your partner’s spouse or heirs?
These matters may seem unduly remote, but suddenly finding yourself in business with your former partner’s spouse or heirs or having to sell off the business to satisfy the claims of your partner’s estate or creditors can be devastating. What if it’s a bad time to sell? What if you want to continue in business, but lack the capital assets to continue after division and sale of the business?
There are many other similar contingencies. This is where proper succession and business planning go together to protect your assets. Do you want your children to have a share of your business while you are alive, but you want to maintain control?
If you are in business you got an estate plan to cover these and other contingencies?
There are solutions to these and other problems that can easily arise. Proper business planning is essential to avoid difficulties in the future. Consulting experienced legal counsel can be essential in dealing with these and a host of other issues surrounding your small business. A free initial consultation may help you decide whether these or other business planning techniques are right for you or your business.
Contact John V. Stege, Attorney at LawMy Website:
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*As of December 2008 it appears that President Obama will allow the Bush tax cuts to expire. If so, this would mean that the tax threshold for estate tax would revert to the situation in 2001, which would be a $1,000,000 exemption. Anyone with more than this amount could potentially be subject to tax. This area of law is most uncertain, so maximum flexibility in creating an estate plan is necessary.
Since the most recent changes to the Estate Tax it is now certain that a couple with less than $6 million or an individual with less than $3 million in assets will NEVER be subject to the Estate Tax!
What Does This Mean for Middle-Class Families?
Simply put, a single person with no dependents and an estate worth less than $3 million can have a "simple will." This is just a document to leave their estate to whomever they wish. Depending on your state laws, the entire document might fit on one legal sized page.
This doesn't take into account the need for someone to make medical or financial decisions if you are incapacitated. For that you would still need a power of attorney and a advanced medical directive or "living will."
But, as far as the Will itself goes, there's no longer the need for sophisticated tax planning for middle class families.
But, What If I Have Children? What Do I Do As A Responsible Parent?
This is a different matter. If you have children then you will still need a will with proper trust language written into it.
This is because in many states your child would inherit all your property at the age of majority (mostly 18)! So, if anything were to happen to you, your children would inherit outright any life insurance proceeds, real property, retirement accounts or other assets you might have.
Suppose both you and your spouse were killed in a car accident?
If your child were orphaned whoever was appointed guardian could keep all your assets held in trust for the benefit of your child, saving the money for necessities like clothing, medical care or education. But, unless you establish a trust in your will that provides for a longer term (until the child reaches the age of 25, say) then all your assets would by operation of state law, pass to your child at the age of majority.
Since as a responsible parent you should probably have a life insurance policy sufficient to at least send your children to college, this could be at least several hundred thousand dollars in assets.
Will your child at age 18 or 21 have the maturity to handle such a sudden windfall?
If you think, "maybe not" then you are like most parents! It might well be better sense to make sure that the money would be used wisely -- for education, to make a downpayment on a home or apartment, to start a business or to simply invest to provide long-term for the child's future for instance.
Establishing a will with a trust arrangement to handle such assets and naming a trusted business adviser or family member to act as trustee of the trust can solve this problem.
If you are a parent with a minor child, you should consider contacting an experienced Estate Planning Lawyer in your state to consider what trust arrangements you should make to safeguard your children's future.
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