Obama Signed the Tax Deal Into Law

On Friday, December 17, 2010, President Obama signed an $858 billion tax bill into law, extending the Bush-era tax cuts another two years. Under the law, the individual estate tax exemption for the next two years is $5 million, and a 35% tax rate.

Further, under the tax bill estate assets will receive stepped up basis - that is, the basis of the assets of such estates is their fair market value as of date-of-death of the decedent, not the modified carryover basis of the decedent. What is the tax benefit of stepped up basis? Any appreciation in the value of the asset that occurred during the decedent's lifetime will not be subject to capital gains tax when sold by the heir.

Executors of the estates of decedents who died in 2010 can elect the 2010 law (no estate tax, but no stepped up basis for assets either) or the 2011 law (35% tax rate, $5 million exemption, and stepped up basis for assets), whichever works out best for the heirs.

The 2011 Estate Tax Exemption - Things Are Looking Up!

President Barack Obama's tax deal with Republican Congressional leaders passed a key Senate procedural hurdle today, CNN.com reports. As indicated in my previous post, the individual estate tax exemption went from $3.5 million (at a 45% tax rate) in 2009 to zero in 2010 under a legislated expiration date. If Congress fails to act by the end of the year, the individual estate tax exemption in 2011 will be $1 million with a 55% tax rate. Such a low threshold would place an astronomically large amount of the American population (and pretty much any Californian owning real property) within the estate tax's reach. Under Obama's compromise with Congressional leaders, which is currently steadily making it's way through the legislative process with hopes of being passed before the 111th Congress adjourns, the individual estate tax exemption would rise to $5 million with a 35% rate. Stay tuned for updates if/when Congress passes this tax deal, or for further explanation as to possible estate planning consequences if they fail to push it through...

George Steinbrenner and the 2010 Estate Tax Repeal

It has been awhile since I posted, but a friend pointed this article out to me, and I thought it was interesting enough to repost: http://www.thefiscaltimes.com/Issues/Taxes/2010/07/28/The-Estate-Tax-Can-George-Steinbrenner-Change-the-Debate.aspx

Steinbrenner's death during 2010, the year of the repealed estate tax, means that Steinbrenner's heirs received $500 million more than they would have had he died last year, and also means the government missed out on $500 million. Great article on the ongoing debate: to repeal the estate tax or not?

I Don't Have Much - Do I Need an Estate Plan?

Nobody likes to think about death, or becoming incapacitated due to an accident, but unfortunately life throws unexpected curve balls. Many people mistakenly believe that estate plans are only for the uber-rich... wrong! Whether you're single, married, young, old, rich, or poor: EVERYONE probably needs some kind of estate planning in place.

Maybe you're relatively young, and you have few to no assets. Or maybe you have a house, car, a pension or 401K, and some personal items, and that's it. Or you are worth millions. It doesn't matter. What it comes down to is whether you want to dictate what happens with yourself and your assets in the future, or whether you want California's default rules to make all of these decisions for you.

Some basic estate planning tools that almost everyone needs (note: these items will vary with the contents and size of your estate, and your family situation - always consult an attorney when making an estate plan):
(1) Advanced Health Care Directive and HIPAA Release: Designates who can make medical decisions for you and who can have access to your private medical records if you can't do this for yourself.
(2) Durable Power of Attorney for Assets: Designates someone to manage your assets if you become unable to do so yourself. (I.e., manage your bank accounts, pay your bills, take care of your finances, etc.)
(3) Will: Designates who (or what - i.e., a trust) will receive your assets after your death. Otherwise, California law has "default" rules as to who will receive your assets. Also, if you have minor kids, you can designate a guardian to care for your kids in the event of your death.
(4) Revocable Living Trust: If your will designates a trust to receive your assets, the trust provides for how your assets will be distributed and if properly drafted (usually) minimizes the costs and burden associated with Probate Court after your death.

The California State Bar has a pamphlet which gives a nice overview of many of these issues: http://www.calbar.ca.gov/calbar/pdfs/publications/Pamphlet_Estate-Planning_English.pdf

This post is not intended to be legal advice-- always consult an estate planning attorney to discuss these issues, because estate plans involve many complicated issues that a professional should analyze.

Where'd the Estate Tax Go?

Under the Bush administration's reign, the Federal estate tax exemption soared - in 2009, up to $3.5 million of a single person's estate ($7 million combined for a married couple) was exempt from the estate tax. However, under the Code, the estate tax was set to expire as of 2010 - i.e., as of New Years Day 2010, the estate tax has been repealed in its entirety. This means that if one were to die today, January 6, 2010, no matter if their gross estate is valued at 20 bucks or 20 million bucks, the decedent's estate would not technically be subject to any estate tax under the law as it exists at this moment.

For those advocating the death of the estate tax, this is wonderful -- however, it could cause problems for some. For example, persons with a so-called "bypass trust" in place (i.e., "I want the amount that will not create any federal estate tax to go to my kids; I want everything else to go to my spouse") may have problems having their last wishes play out as intended, unless their estate planning documents are revisited. Also, the repeal of the estate tax means the scaling back of an important tax break: the step-up in cost basis.

Of course, Congress is indicating that when it returns to work next month, a retroactive "fix" will be passed. But is this fair? Last time I checked, the Constitution (see Article 1, Sections 9 and 10) prohibited ex post facto legislation. However, the Supreme Court unanimously ruled in a 1994 opinion (United States v. Carlton) that retroactive tax laws did not violate the Constitutional prohibition on ex post facto legislation, provided their retroactive application was "supported by a legitimate legislative purpose furthered by rational means." What a [conveniently] vague standard. Even if Congress does not pass retroactive legislation in the next couple of months, the estate tax may come back with a vengeance in 2011.

What will happen with the estate tax remains to be seen, but in the meantime, persons with bypass trusts in place and those whose assets have more than $1.3 million worth of appreciation should consult their estate planner during this uncertain time. For more information, feel free to contact me at (858)551-2440.