Major Change in Recent Estate Tax Legislation

As we reported on our Blog in December, Congress enacted new estate tax legislation in late 2010 that makes radical changes to the estate tax law that would have gone into effect on January 1, 2011. Under the old law, each person dying after December 31, 2010, would be entitled to a $1 million estate tax exemption, and any assets that he owned in excess of $1 million would be taxed at a maximum rate of 55%. Under the new legislation, taxpayers dying in 2011 and 2012 will be entitled to a $5 million exemption, and any assets in excess of $5 million would be taxed at a maximum rate of 35%.

It is easy to see that the new legislation contains two major changes. First, the estate tax exemption amount is increased from $1 million to $5 million per person in the United States. Second, the maximum tax rate imposed on the assets someone owns in excess of the exemption amount is reduced from 55% to 35%. These changes, undoubtedly, stand to save families substantial sums when family members die.

While these changes have been discussed widely in the media, another important change was enacted in the 2010 legislation that marks a dramatic shift in estate tax law. The new legislation contains a “portability” provision that allows the estate tax exemption of one spouse to be carried over upon their death and added to the surviving spouse’s exemption. Thereafter when the second spouse dies, he or she can utilize both exemptions to leave their children $10 million instead of $5 million.

For example: Jack died in January 2011 at the age of 85. He and his wife, Jane, owned combined assets valued at $9 million on the date of Jack’s death. Jane’s health is not good. She is not expected to live longer than another 6 months beyond Jack’s death. Her Will leaves all of her assets to the couple’s 3 children.

Under the prior version of the estate tax law, when Jack died leaving all of his assets outright to Jane, they lost Jack’s $5 million exemption. Consequently, upon Jane’s later death, when she left all $9 million to the 3 children, Jane’s estate could utilize her $5 million exemption but would have to pay taxes on the remaining $4 million. With a maximum tax rate of 35%, their children would end up paying over $1 million in taxes.

However, with the new portability provision, when Jack died leaving his assets to Jane, he can also leave her his $5 million exemption. As a result, when Jane later dies, she would be able to combine her $5 million exemption with Jack’s $5 million exemption to leave their children up to $10 million tax-free. Accordingly, upon Jane’s death, the couple’s entire $9 million would pass tax-free to the children.

The portability option is a substantial change in estate tax law, and it stands to provide a significant advantage to many clients. However, the new law contains several pitfalls in this portability provision. It also creates some new problems in putting together estate tax planning options. For more information about these pitfalls and challenges in estate planning, please contact us to discuss them more fully.

Five Documents to Include in Your New Year’s Resolutions

Now that you’ve recovered from the holidays and can focus on starting the New Year off right, it’s time to stop putting off getting those estate planning documents done and make this the year you cross that resolution off your list. The only question is which documents do you need? Well here’s a list of the five most important ones to get you started.

#5 – Designation of Guardian Before the Need Arises
This one is by far the most underutilized document on this list but speaking from experience as a litigation attorney, this is one of the most important documents to have to avoid a fight later on. This document allows you to name your guardian (or perhaps more importantly specifically disqualify someone from serving as your guardian) before the need for such a guardian arises. Few cases can get as emotionally charged as a contested guardianship. This is especially true in situations where there’s a new marriage late in life. To avoid the heartache that comes with such a fight, do your family a favor and specifically name who you want to be your guardian now while there’s no question as to your capacity. Trust me, they will thank you for it later.

#4 – Directive to Physicians
Another example of a choice you can make now that will save your family untold amounts of heartache and gut-wrenching later. Sometimes called a DNR, this document instructs doctors as to what level of life sustaining treatment they are to employ should you find yourself in a persistent vegetative state. Do you want the doctors to do all they can to keep you alive via all available means? Or would you rather not rely on machines to prolong your life artificially? Don’t make your loved ones have to guess at what your wishes are, get this document drafted and leave no doubt as to your choice.

#3 – Statutory Durable Power of Attorney
This is another document that can save you tons of money in the long run. A Statutory Durable Power of Attorney is a document that allows you to name an Agent to act on your behalf should you become incapacitated later. This allows you to avoid the necessity of a guardianship altogether. Your agent has the ability to act on your behalf without needing to be named as your guardian. Now you might be asking yourself why you should go the trouble of designating a guardian as stated in #5 if you are just going to draft a Power of Attorney as well. Well, think of it this way, you become incapacitated and your daughter (who you named as your Agent under a POA) takes over your affairs. Sounds great right? But what happens when your caregiver hands you a piece of paper and convinces you to sign it, and it turns out to be another POA which revokes the one where you named your daughter as your agent and all of the sudden names your unscrupulous caregiver as your agent. In light of the fact that a guardianship overrides a POA, you prevent a cycle of dueling Agents by naming your guardian and giving them the trump card to step in take control for good.

#2 – Medical Power of Attorney
Same document as #3 only this one deals with your medical care instead of your financial dealings.

#1 – Will
The granddaddy of them all, your will is the most important document you can write. The reason being that it’s the one document that speaks for you when you are gone. Too many times people come into my office and told me that their loved one told them in no uncertain terms that they were to receive certain property but that such bequest wasn’t contained in the Will or worse there was no will. Every time I am stuck telling them that while I believe them, it doesn’t matter because without a will the probate code controls the disposition of an estate, and with a will the four corners of the document control. So if you’ve been putting it off, the time is now to get it done. If you happened to have a will already but need to tweak it, perhaps a codicil is all you need. Either way, get it done, 2012 will be here before you know it.