Estate tax remains unresolved

It has come to this: Congress, quite by accident, is incentivizing death.

When the Senate allowed the estate tax to lapse at the end of last year, it encouraged wealthy people near death's door to stay alive until Jan. 1 so they could spare their heirs a 45% tax hit.

Now the situation has reversed: If Congress doesn't change the law soon—and many experts think it won't—the estate tax will come roaring back in 2011.

Not only will the top rate jump to 55%, but the exemption will shrink from $3.5 million per individual in 2009 to just $1 million in 2011, potentially affecting eight times as many taxpayers.

The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million.

Of course, there is a "death incentive" whenever Congress raises the estate tax. But it hasn't happened in decades; the top rate has held steady or fallen since 1942, according to tax historian Joseph Thorndike of Tax Analysts, a nonprofit group. In fact, the jump from zero to 55% would be "the largest increase in a major tax that we've ever seen," Mr. Thorndike says.

Too Rich to Live? The estate tax is set to come roaring back in January. That sets the stage for a perverse calculus: End it all—or leave a massive bill for your heirs to deal with. WSJ.com, July 10, 2010

Do It Yourself Estate Planning Pitfalls

The pros and cons of DIY estate planning are discussed in yesterday's article in US New and World Report:

"Unless you are single and have absolutely no money," says Brooklyn-based estate planning and tax lawyer Hani Sarji, you need an estate planner, because people tend to make mistakes when they fill out their own forms online. "People might get a false sense of security from DIY estate planning," Sarji adds, and answering one question incorrectly or overlooking something such as appointing a guardian for children can lead to major problems down the road.

On her blog, estate planning lawyer Leanna Hamill writes about a colleague who had a client who used an online do-it-yourself will that he failed to update after some of his beneficiaries died and he opened new bank accounts that weren't mentioned on the form. "That is the reason to have an attorney assist you with this process. We know the questions to ask, and we know what to do with the answers," she writes.

"Without a lawyer, you might not understand the terms," says Deborah Jacobs, author of Estate Planning Smarts. Therefore, you could inadvertently give someone more power than you want to when creating a "durable power of attorney" document, for example. That document essentially gives someone else the power to take care of your finances if you become incapacitated. Jacobs says that if that person isn't trustworthy, he or she could steal from you. She also warns that if the document isn't executed properly—in some states you need witnesses to your signature—then it might not even be valid.

Another risk, says Jacobs, is that when it comes to transferring your money to family members after you pass away, a self-written will might contain holes that lead to errors.

As with other areas of the law, other lawyers, who don't practice estate planning law, have hired me to assist them with their estate plan; if they know they can't tackle an incorporation or an estate plan without some advice and counsel, do you believe you can do better?

Michael Jackson's Estate and Estate Planning (press item)

Recently quoted in the press on Michael Jackson's estate, will/trust, and creditor and child custody issues:

Though Michael Jackson’s body isn't in the ground yet, speculation is running rampant as to what will happen to his financial assets. Many suspect that legions of those only tangentially connected to the pop star are already sharpening their knives for their shares of the possible profits.

"There are a lot of dark characters that are going to try to make a buck out of this because Michael Jackson, unfortunately, is such a polarizing figure and his name is greater than any individual’s name on earth," said Aphrodite Jones, author of "The Michael Jackson Conspiracy."

"That being the case, everyone and anyone during his life tried to make money any way they could, and I don’t think that will end because of his death," Jones explains. "You think about Elvis Presley and all of the people who have made livings as impersonators and the Graceland tours, etc. — that’s nothing compared to what we’re going to see here."

As far as legal entitlements, Jackson's assets are undercut by the $400 million in debt that the pop star left behind.

Jonas M. Grant, an entertainment lawyer in Burbank, Calif., explains. "In general, creditors get the first crack at the contents of a deceased’s estate," he said.

Entertainment lawyer Jonas M. Grant says the mother of two of Jackson's children, Debbie Rowe, will likely get custody of those children and their inheritance. "[She] will benefit financially indirectly even if she is not named as a direct beneficiary of his estate, which she also may well be."

Vultures set to profit off of Jackson’s death: Skeptics say those who exploited him in life ready to strike again, Heidi Patalano, Metro International, June 29, 2009

Update: When quoted for the above news article, I didn't have the benefit of reviewing Michael Jackson's purported last will, which can be seen below, and is a pour-over will, essentially directing that all of his property not already titled to the "Michael Jackson Family Trust" be added to that trust, for distribution to the beneficiaries named in that trust:


Michael Jackson's Will - full screen (new window)

"George W. Bush" on Estate Planning

Because "between 100 and 200% of Americans don't have a will or an old testament"....

Bankrate.com Survey: 76% Believe Everyone Should Have a Will, But 57% Don't Have One

Even though three-quarters of our poll respondents (76 percent) believe that everyone should have a will, a whopping 57 percent of Americans don't have one themselves.

Parents of kids younger than 18 make an even poorer showing: 67 percent don't have a will, despite the fact that 88 percent of parents believe wills are an important way to appoint guardians....

This tendency to procrastinate is common to people of all education levels and walks of life, says Marshall Jones, an attorney and accredited estate planner at RMJ Family Wealth Planning in West Palm Beach, Fla.

"It's not surprising that most people don't have a will," he says. "Most attorneys don't have a will.

"Before I was in law school, the chairman of the U.S. Senate Finance Committee died. He was a wealthy man in his own right and his committee was responsible for tax legislation. They found his will in his desk drawer ... unsigned. His family paid millions more in taxes because he did not complete his planning. Not much has changed since then. Many successful people plan every thing else in their lives except their estate plan."

Americans' words and deeds about wills at odds, Bankrate.com, November 19, 2007

Billionaries fight estate tax repeal

Billionaire Warren Buffet, one of the world's richest men who, critics note, will personally avoid the payment of most or all death taxes on his estate by giving most of it away to charity, went to Congress today to encourage Democrats to retain the estate tax, against the wishes of the Bush Administration and small business groups:

Billionaire investor Warren Buffett urged senators Wednesday to reject calls by the Bush administration and business groups to permanently repeal the estate tax.

"A progressive and meaningful estate tax is needed to curb the movement of a democracy toward plutocracy," Buffett, the chairman of Berkshire Hathaway told the Senate Finance Committee.

Buffett has long opposed efforts to repeal the tax.

Under the tax-cut package signed by President Bush in 2001, the exemption on the estate tax increases each year, culminating in full repeal in 2010. But the legislation expires at the end of 2010, and estate tax levels return to their pre-2001 levels -- a top tax rate of 55% on inheritances of more than $1 million -- in 2011.

Senate Finance Committee Chairman Max Baucus, D-Mont., said he supports full repeal, but that such a measure doesn't have adequate support. Baucus, noting that less than 1% of families are now subject to the tax, urged lawmakers and others to craft measures designed to exempt most family-owned farms and small businesses.
Sen. Charles Grassley of Iowa, the committee's senior Republican, repeated a call for full repeal.

Grassley said the prospect of family members being forced to sell a business to meet a tax bill shows that the estate tax is fatally flawed from a technical standpoint.
"Instead of the free market determining when assets are bought or sold, the death tax makes that determination," Grassley said....

Buffett urges Senate to oppose estate-tax repeal, CBS Marketwatch, November 14, 2007

See also: Senate Plan to Repeal Inheritance Tax Fails, Washington Post, June 9, 2006

Hillary Clinton, Democrat for President, on the Estate Tax

In the first in a series, California Business Law Blog examines the Republican and Democrat presidential candidates' stance on the estate tax, sometimes also know as the death tax or ibheritance tax. First up, Senator Hillary Clinton (Democrat - New York):

Her current presidential platform proposal, which is to some extent inconsistent with her prior voting record, as can be seen below, is to freeze the federal estate tax at 2009 levels, that is, a $3.5 million exemption (she describes this as a $7 million exemption, presumably meaning, for a married couple, the combined total of $7 million in exemptions, which requires proper estate planning to take advantage of). As a result of the "Bush tax cut", the estate tax has been trending downward each year and is currently slated to be completely elminated in 2010 (unlimited exemption amount, 0% tax rate, leading to numerous estate planning jokes centering around solving estate tax problems by planning to die in 2010). However, due to a legislative compromise and other technicalities, it is also scheduled to jump back to tge old, higher tax levels commencing 2011 (only $1 million exemption, 55% tax rate on the balance). It is unlikely give the current political climate that the currently-scheduled death tax rates for 2011 will be allowed to stand unchanged.

For reference purposes, as this is written, in 2007, the exemption amount is $2 million, and the estate tax rate is 45%.

Recently, on the campaign trail in Derry, New Hampshire, Clinton --

answered questions from voters at a town hall at the opera house here, which was her second stop on a two-day swing through the state.

The first question from the audience after Clinton's speech came from a woman who challenged her plan to pay for universal retirement accounts by freezing the estate tax at 2009 levels. The woman said the money from inheritance had already been taxed when it was earned and she felt taxing it again was the wrong way to fund Clinton's plan.

"People disagree about this, but the estate tax, which came into being by Republicans like Teddy Roosevelt and others, and has been part of our tax system for a very long time is there for a real simple reason: In America, we've never liked the idea of massive inherited wealth," Clinton replied. "Part of the reason why America has always remained a meritocracy where you have to work for what you get, where you have to get out there, make your case to people, come up with a good idea, is that we never had a class of people sitting on generation after generation after generation of huge inherited wealth."

Clinton said people like Bill Gates and Warren Buffet were against doing away with the estate tax, because they made it on their own. She went on to explain, to applause, that a married couple could have an estate worth up to $7 million before getting taxed, and said she considered that a "pretty healthy estate to leave to your children."

Source: MSNBC.com: Clinton Questioned on Estate Tax, October 10, 2007

Critics of Clinton's, Gates', and Buffet's argument - not present to state their arguments in New Hampshire - point out that these men are so wealthy that they do not represent the typical high net worth family that is often attempting to pass a family business or farm along to the next generation, and are millionaries, not billionaires. Gates and Buffet deal in publicly traded companies, and cannot pass along Microsoft or Berkshire Hathaway, each worth billions beyond the personal wealth of either businessman and each owned by thousands of investors, to their children.

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As a Senator, she has had the opportunity to vote on the issue serveral times:

Voted NO on raising estate tax exemption to $5 million.

An amendment to raise the death tax exemption to $5 million; reducing the maximum death tax rate to 35%; and to promote economic growth by extending the lower tax rates on dividends and capital gains.

(Proponents recommend voting YES because:

It is disappointing to many family businesses and farm owners to set the death tax rate at what I believe is a confiscatory 45% and set the exemption at only $3.5 million, which most of us believe is too low. This leaves more than 22,000 families subject to the estate tax each year.

Opponents recommend voting NO because:

You can extend all the tax breaks that have been described in this amendment if you pay for them. The problem with the amendment is that over $70 billion is not paid for. It goes on the deficit, which will drive the budget right out of balance. We will be going right back into the deficit ditch. Let us resist this amendment. People could support it if it was paid for, but it is not. However well intended the amendment is, it spends $72.5 billion with no offset. This amendment blows the budget. This amendment takes us from a balance in 2012 right back into deficit. My colleagues can extend those tax cuts if they pay for them, if they offset them. This amendment does not pay for them; it does not offset them; it takes us back into deficit. It ought to be defeated.

Reference: Kyl Amendment; Bill S.Amdt.507 on S.Con.Res.21 ; vote number 2007-083 on Mar 21, 2007);

Voted NO on supporting permanence of estate tax cuts.

Increases the estate tax exclusion to $5,000,000, effective 2015, and repeals the sunset provision for the estate and generation-skipping taxes. Lowers the estate tax rate to equal the current long-term capital gains tax rate (i.e., 15% through 2010) for taxable estates up to $25 million. Repeals after 2009 the estate tax deduction paid to states.

(Proponents recommend voting YES because:

The permanent solution to the death tax challenge that we have today is a compromise. It is a compromise that prevents the death rate from escalating to 55% and the exclusion dropping to $1 million in 2011. It also includes a minimum wage increase, 40% over the next 3 years. Voting YES is a vote for that permanent death tax relief. Voting YES is for that extension of tax relief. Voting YES is for that 40% minimum wage increase. This gives us the opportunity to address an issue that will affect the typical American family, farmers, & small business owners.

Opponents recommend voting NO because:

Family businesses and family farms should not be broken up to pay taxes. With the booming economy of the 1990s, many more Americans joined the ranks of those who could face estate taxes. Raising the exemption level and lowering the rate in past legislation made sense. Under current law, in my State of Delaware, fewer than 50 families will face any estate tax in 2009. I oppose this legislation's complete repeal of the estate tax because it will cost us $750 billion. Given the world we live in today, with clear domestic needs unmet, full repeal is a luxury that we cannot afford.

To add insult to this injury, the first pay raise for minimum wage workers in 10 years is now hostage to this estate tax cut. We are told that to get those folks on minimum wage a raise, we have to go into debt, so that the sons and daughters of the 7,000 most fortunate families among us will be spared the estate tax. We must say no to this transparent gimmick.

Reference: Estate Tax and Extension of Tax Relief Act; Bill H.R. 5970 ; vote number 2006-229 on Aug 3, 2006);

Voted NO on permanently repealing the "death tax".

A cloture motion ends debate and forces a vote on the issue. In this case, voting YES implies support for permanently repealing the death tax. Voting against cloture would allow further amendments. A cloture motion requires a 3/5th majority to pass. This cloture motion failed, and there was therefore no vote on repealing the death tax.

(Proponents of the motion say:
We already pay enough taxes over our lifetimes We are taxed from that first cup of coffee in the morning to the time we flip off the lights at bedtime. If you are an enterprising entrepreneur who has worked hard to grow a family business or to keep and maintain that family farm, your spouse and children can expect to hear the knock of the tax man right after the Grim Reaper.
In the past, when Congress enacted a death tax, it was at an extraordinary time of war, and the purpose was to raise temporary funds. But after the war was over the death tax was repealed. But that changed in the last century. The death tax was imposed and has never been lifted.
The death tax tells people it is better to consume today than to invest for the future. That doesn't make sense.

Opponents of the motion say:

Small businesses and farms rarely--if ever--are forced to sell off assets or close up shop to pay the tax. Under the current exemption, roughly 99% of estates owe nothing in estate taxes. By 2011, with a $3.5 million exemption, only two of every 100,000 people who die that year would be subject to the estate tax.
Today's vote is on a motion to proceed to a bill to repeal the estate tax. Not to proceed to a compromise or any other deal--but to full repeal. I oppose full repeal of the estate tax. Our Nation can no longer afford this tax break for the very well off. Permanently repealing the estate tax would add about $1 trillion to our national debt from 2011 to 2021.

Reference: Death Tax Repeal Permanency Act; Bill HR 8 ; vote number 2006-164 on Jun 8, 2006).

Source: On the Issues: Hillary Clinton on Tax Reform

The conservative Club for Growth, which favor repeal of the estate tax, rated Clinton's voting record 8 out of 100 for 2006 for pro-growth economic policies.

See also:

John McCain, Republican for President, on the Estate Tax
Barack Obama, Democrat for President, on the Estate Tax
Hillary Clinton Offical Site: Economic Blueprint

June 2008 update: Hillary Clinton ended her 2008 bid for the White House on June 7, 2008, leaving Barack Obama as the presumptive Democrat nominee.

Estate Planning Basics / Overview Top Ten

CNN & Money Magazine has a pretty good basic introduction to estate planning that may be valuable to review prior to speaking to an estate planning attorney and which explains why a will or trust is just one part of a comprehensive overall estate plan, and why estate planning is not just for the wealthy:

1. No matter your net worth, it's important to have a basic estate plan in place.

Such a plan ensures that your family and financial goals are met after you die.

2. An estate plan has several elements.

They include: a will; assignment of power of attorney; and a living will or healthcare proxy (medical power of attorney). For some people, a trust may also make sense. When putting together a plan, you must be mindful of both federal and state laws governing estates.

3. Taking inventory of your assets is a good place to start.

Your assets include your investments, retirement savings, insurance policies, and real estate or business interests. Ask yourself three questions: Whom do you want to inherit your assets? Whom do you want handling your financial affairs if you're ever incapacitated? Whom do you want making medical decisions for you if you become unable to make them for yourself?

4. Everybody needs a will.

A will tells the world exactly where you want your assets distributed when you die. It's also the best place to name guardians for your children. Dying without a will - also known as dying "intestate" - can be costly to your heirs and leaves you no say over who gets your assets. Even if you have a trust, you still need a will to take care of any holdings outside of that trust when you die.

5. Trusts aren't just for the wealthy.

Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay, and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits.

6. Discussing your estate plans with your heirs may prevent disputes or confusion.

Inheritance can be a loaded issue. By being clear about your intentions, you help dispel potential conflicts after you're gone.

7. The federal estate tax exemption - the amount you may leave to heirs free of federal tax - has been rising gradually and will hit $3.5 million in 2009.

Meanwhile, the top estate tax rate is coming down. The estate tax is scheduled to phase out completely by 2010, but only for a year. Unless Congress passes new laws between now and then, the tax will be reinstated in 2011 and you will only be allowed to leave your heirs $1 million tax-free at that time.

8. You may leave an unlimited amount of money to your spouse tax-free, but this isn't always the best tactic.

By leaving all your assets to your spouse, you don't use your estate tax exemption and instead increase your surviving spouse's taxable estate. That means your children are likely to pay more in estate taxes if your spouse leaves them the money when he or she dies. Plus, it defers the tough decisions about the distribution of your assets until your spouse's death.

9. There are two easy ways to give gifts tax-free and reduce your estate.

You may give up to $12,000 a year to an individual (or $24,000 if you're married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred.

10. There are ways to give charitable gifts that keep on giving.

If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.

CNNMoney.com, "Money 101 - Lesson 21: Estate Planning, Top Things To Know", not dated (but apparently up to date as of this posting).

Incorporation Service Pursued by State Bar

The State Bar of Michigan has successfully obtained a permanent injunction from the Kent County Circuit Court against the "We the People USA, Inc.," and its franchises in the state from engaging in the unauthorized practice of law.

The consent judgment was a result of action taken in response to a complaint received by the State Bar of Michigan that "We the People of West Michigan LLC," drafted a special needs trust for an individual and that the trust did not meet statutory requirements. Had the elderly individual funded the trust, she would have suffered serious financial harm. The defendants were ordered to pay the State Bar $150 in costs and to reimburse the victim $356.

"The State Bar is committed to protecting Michigan residents from entities and individuals not licensed to provide legal services or advice," said SBM President, Kimberly M. Cahill. She added that the Bar usually receives 100-150 complaints each year about persons or organizations that are practicing law or giving legal advice without a license. Most of these complaints are usually resolved through correspondence with the offender. In rare cases, litigation becomes necessary.

State Bar of Michigan Press Release 1/27/2007