New Jersey Estate Planning & Elder Law Blog

65% of Americans Don't Have a Will - Staggering as 100% will die someday

Deirdre Wheatley-Liss — Wed, 03 Mar 2010 11:58:25 -0500

Why don't people create a Will? Reasons I have heard range from I don't have enough money to worry about it, I trust xyz person to take care of it, it is too complicated or expensive, to people who sincerely believe that if they make a Will they may die.

Apparently, all these reasons and more are very strong as Forbes.com reports that 65% of Americans do not have a Will. The article, brought to my attention by Michael Rinne, outlines some of the reasons people give for not making a Will.

I understand all the reasons why for many people making a Will is not a priority. There are oodles of things not a priority in my life.

However, for parents of minor children, the only place to name Guardians for your children upon your death in is your Will. Whatever reason you have for not thinking you need a Will, it is superseded by your need as a parent to provide for who will care for your children in the event of your death.

To make it easy, go to www.legalzoom.com and have a Will prepared on-line if seeking professional services is not a priority at this time. I have blogged before on the pros and cons of computerized Wills, and an article on the subject is being talked about on Twitter today, but in the case of naming care for minor children, something is definitely better than nothing.

What are your thoughts on why 65% of Americans don't have a Will?

Charitable Remainder Trust - Give your tax dollars to charity instead

Deirdre Wheatley-Liss — Mon, 01 Mar 2010 10:37:27 -0500

Jensen Law Offices has a great post summarizing the mechanics and usefulness of a Charitable Remainder Trust or CRT. A CRT is one of those great tax techniques where you get to have your cake and eat it too.

A CRT is a split gift between a charity and your family. For example - you leave a portfolio in a trust where your children get 7% a year for their lives, and when the child dies, the charity gets the balance of the portfolio. Your estate is entitled to a tax deduction (since NJ still has an estate tax, this is relevant in 2010 as well as 2011 and beyond when the federal estate tax reappears). Your children get an income stream for live, and the charity has the reminder upon their deaths.

Note that when you have a taxable estate charitable giving at its most basic is taking dollars that your family would not have gotten anyway (because they had to go to taxes) and directing them to charity. With a CRT you are compounding this by getting the tax benefits and giving the family a stream of dollars.

Image: Salvatore Vuono / FreeDigitalPhotos.net

New Credit Card Protections for Consumers

Deirdre Wheatley-Liss — Mon, 22 Feb 2010 17:03:32 -0500

Starting today (February 22, 2010) all credit card companies must comply with new consumer protection rules issued by the Federal Reserve Bank. Among these rules:

1. You must be given 45 days notice before an

increase in interest rate
change to annual fee, late fee, cash advance fee, etc.
other significant changes to the terms of your account

2. Your monthly bill must show how long it will take to pay off the balance if you only pay the minimum monthly fee in a clear chart (i.e. you owe $3000, the monthly minimum is $90 at 14.4% - it will take 11 years and cost you $4745).

3. No interest rate increases for the first year of the card

4. Rate increases only apply to new transactions, not existing balances

5. Over the limit transactions will be restricted unless you advise your credit card company otherwise

6. Applicants under 21 must be able to demonstrate they can make payments (instead or luring in college students who have no source of income and then forcing them to declare bankruptcy)

7. Standard payment dates and times

8. Payments must be applied to higher interest balance

Thanks to Tonya R. Coles, Esq. (via Facebook) for sharing this important news).

Disclaimers - Saying "No" to Your Inheritance

Deirdre Wheatley-Liss — Fri, 19 Feb 2010 08:01:45 -0500

The New York Times ran an article this week "Saying ‘No Thanks’ to a Bequest". In the article, Deborah L. Jacobs explores how a disclaimer provision either included in an estate plan, or created after death, can achieve some estate tax savings in this environment of uncertainty about the federal estate tax this year or next.

In an estate plan a "Disclaimer" is when a beneficiary says "No, I don't want that part of my inheritance." Now, why would a person not want an inheritance? Well, for a spouse, a disclaimer is used more accurately to say "I don't want to take my inheritance outright, and therefore it should pass to a trust where I am a beneficiary." This trust could capture the exemption amount from federal estate taxes if and when the federal estate tax comes back. A disclaimer creates flexibility in a period of uncertainty as the spouse doesn't have to decide now if it makes sense to fund the trust, they can wait and see what the tax laws are at the time the first spouse dies.

The article outlines how a disclaimer works, the benefits of disclaimers (flexibility being key) and some of the drawbacks (what if the spouse doesn't disclaim, or accepts the assets so they can't disclaim). However, I think the article misses one key point about how using disclaimers to create trust can create inflexibility. If a person sets up a trust in their Will and directs that it be funded (i.e.: put $1 million is this trust) instead of allowing it to be funded through a disclaimer (i.e.: I spouse disclaim $1 million which will now pass to a trust), then the trust can give a person a "Power of Appointment" over the trust.

A "Power of Appointment" essentially allows a person to change who gets the trust funds and how after the death of the decedent. This is incredibly powerful in using a trust. A trust will last for years or decades after your death. Unless you have a crystal ball, you don't know what will happen to your beneficiaries, or what the tax laws will be in the future. By setting up a trust for your spouse and children, and giving your spouse a Power of Appointment, your spouse has the ability to change how your children eventually get your assets after your spouses' death. For example, if a child has a health issue, your spouse can change the trust to leave more to that child, or to leave it to the child in trust instead of outright. Without the Power of Appointment the child might get money that would negate other benefits he was receiving.

So how to balance the flexibility of a disclaimer with the flexibility of a Power of Appointment? In New Jersey, where we have a state level estate tax of $675,000, we recommend a "3-Part Will".

Part 1 - An amount equal to $675,000 goes to a family trust with a power of appointment in favor of the surviving spouse
Part 2 - An amount equal to the difference between (1) the federal estate tax exemption amount (if any) and $675,000 go to the spouse - the spouse can disclaim this amount to a family trust if it makes sense from an estate tax perspective
Part 3 - The balance to the spouse

Life Estates - Estate Tax and Inheritance Tax Consequences

Deirdre Wheatley-Liss — Thu, 18 Feb 2010 08:23:00 -0500

Life estates are commonly used in elder law asset protection planning. Mom owns a house worth $400,000. She gives the house to her children(a "remainder interest"), and keeps the right to live in the house during her lifetime (a "life estate interest"). The gift of the remainder interest is "transfer" for Medicaid purposes, and starts the clock on the 5 year lookback period.

The gift of the house subject to a life estate is a popular asset protection planning technique because it is easy to understand and less invasive to lifestyle than other transfer techniques. Making a gift of a remainder interest simply involves the attorney preparing a deed and associated real estate transfer documents. There are no realty transfer tax consequences - realty transfer tax is not assessed in New Jersey for transfers without consideration (i.e.: a gift). Also, using a life estate technique not much changes from a practical perspective as the life estate holder (ie: Mom) continues to be responsible for all property taxes, maintenance and upkeep - and is still entitled to the Senior property tax rebate. Perhaps most importantly, you don't spend your house, so it is emotionally easier to give away an interest in a house than to give away cash dollars that you may still want to spend. For those who think they are at least 5 years away from a nursing home, a transfer of a house subject to a life estate can be a home run as the house tends to be the most valuable single asset.

But what happens from a tax perspective when the owner dies? (Assuming the death is not in 2010 when we have no federal estate tax - see my prior post on estate tax implications for deaths in 2010)

If you give away an asset and keep a life estate in that asset, the life estate acts like a "string" that pulls 100% of the value of the asset into your taxable estate. From an estate tax perspective, this mean that (1) 100% of the value of the house is included in decedents taxable estate, and (2) the cost basis of the house is "stepped-up" to the value of the house on date of death (IRC 2036). So, if Mom bought the house for $40,000 and it is now worth $440,000, Mom's estate includes the house valued at $440,000, and kids get the house with a $440,000 basis. When they sell the house for $450,000 down the road, then they only have $10,000 of capital gain. The $400,000 of appreciation that occurred during Mom's lifetime essentially disappears (you potentially pay estate tax instead). If the total estate is less than $675,000 (New Jersey) or $1,000,000 (federal starting in 2011 - unless congress changes it), then there will be no estate tax due. If there is a New Jersey estate tax, the rate ranges up to 16% on amounts over $675,000 - this is far less than the capital gains tax (15% federal plus 7.5% NJ) on $400,000 if Mom simply gave the house to the kids without keeping the life estate.

In New Jersey we also need to contend with the Inheritance Tax if the remainder beneficiaries are not children - for example, Aunt gives her house to her nieces and nephews and retains a life estate. The Inheritance Tax is a separate tax from the estate tax that is assessed against a beneficiary based on their relationship to the decedents - transfers to spouses and children are exempt, transfers to other family members are not. For example, when Aunt dies, the life estate acts to make 100% of the value of the house subject to inheritance tax (NJAC 18:26-5 et seq). So, nieces and nephews get the house, but they need pay an inheritance tax at the rate of 15%-16% with no exemption. The inheritance tax is a credit to the estate tax, so you don't end up paying both taxes if the estate is subject to estate tax and the beneficiaries are not children or spouses.

The benefits of making a transfer of a house subject to a life estate can significantly outweigh any estate tax or inheritance consequences in many situations. The key is to get advise for YOUR situation to see if transfer of a house subject to a lift estate make sense to protect your assets from a Medicaid spend-down.

Who Will Raise your Children? 12 Questions to Consider in Naming a Guardian

Deirdre Wheatley-Liss — Tue, 16 Feb 2010 08:54:09 -0500

Naming a Guardian for minor children is one of the most challenging things to do as a parent - and the most important. While I have never taken a poll, I believe that disagreement over who should be Guardian, or a fear of angering a family member, are the key reasons why young families don't carry out their intention to make a Will.

While naming a Guardian is certainly difficult - the emotion of just to considering the idea, the enormity of influence the Guardian will have over the children - not taking action is worse. If you don't name a Guardian, you are leaving it to a judge who never met you and doesn't know your children to decide who raises them - trust me when I say that a total stranger deciding who will raise your children is much worse then any hurt feelings you are worried about.

While the question of Guardianship is hard, it is one of those things that you need to do as a parent - part of the package. Luckily, I came across this great blog post today at Jensen Law - 12 Tips For Choosing A Guardian For Your Children. This article is a wonderful primer on how to deal with a difficult question and reach a decision. It counters the desire to procrastinate by creating a roadmap to get to an answers. Some ideas? Think beyond the obvious choices - friends may be better guardians than family; focus on love and value, not wealth.

Last point - the ONLY place you can name a Guardian is in a Will. If you have children, go to Legalzoom.com to at least get a Will in place TODAY. A computer generated Will is far superior to nothing a all. Don't let your natural desire to avoid a difficult and unpleasant decision leave your children with no parental guidance at a time they need it most.

Image: Dynamite Imagery / FreeDigitalPhotos.net

Top 10 Elder Law Decisions of 2009

Deirdre Wheatley-Liss — Fri, 12 Feb 2010 09:35:46 -0500

The most important Elder Law decisions from around the country are summarized here. Each case is relevant to New Jersey as elder law often involves Medicaid, which is subject to "supposedly uniform" federal regulation as jointly funded and administered by the federal and state governments. As a result, treatment of a question about Medicaid in one state may eventually become the law of the land in all states.

Elderlawanswers.com has created this top 10 list from the popularity of the cases on its website - I have added topic heading and notes about what impact these cases might have in New Jersey.

Estate Recovery - State That Has Not Expanded Definition of Estate May Still Recover Non-Probate Asset
A Missouri appeals court finds that the state may use an accounting statute to recover Medicaid benefits from a decedent's estate even though the only asset is a non-probate asset and Missouri has not expanded its definition of estate to include non-probate assets. In Re Estate of Jones (Mo. Ct. App., W.D., No. 69310, Jan. 13, 2009). Note that NJ has an expanded estate recovery statute so that Medicaid can have a lien against assets passing by joint ownership or a beneficiary designation when a person dies.
Medicaid Annuity - Annuity Purchased to Benefit Community Spouse Is Available Resource
A New Jersey appeals court holds that under the Deficit Reduction Act of 2005 (DRA) a state may consider the value of an annuity purchased for the sole benefit of the community spouse in determining whether the Medicaid applicant is eligible. N.M. v. Div. Medical Assistance and Health Servs. (N.J. Sup. Ct., App. Div., No. A-0828-07T1, Feb. 26, 2009). See prior posting for a full discussion of New Jersey treatment of Medicaid Annuities.
Promissory Note - Non-Saleable Promissory Note Is Improper Transfer
The Ohio Court of Appeals finds that a non-saleable promissory note is a prohibited asset transfer for Medicaid eligibility purposes because the interest was deferred and it wasn't clear the note barred cancellation upon the loaner's death. Brown v. Ohio Dept. of Job & Family Servs. (Ohio Ct. App., 8th Dist., No. 92008, March 12, 2009). There is a current pending case on the question of the use of promissory notes in New Jersey.
Trusts as Countable Assets for Medicaid - Trust Is an Available Resource Despite Discretionary Language
The Minnesota Court of Appeals finds that a trust's principal and income are both available resources for Medicaid purposes even though the trust's language requires only payments of income to the beneficiary and gives discretion to the trustee to distribute principal. In The Matter of the Stephanie L. Wilcox Trust (Minn. Ct. App., No. A08-1458, May 19, 2009). The lesson here? Trusts must clearly specify if the assets are not available to satisfy long term care needs.
Estate Recovery - Property Owned in Joint Tenancy Falls Under Estate Recovery Rules
A Minnesota appeals court rules that the state may assert an estate recovery claim against property that was owned in joint tenancy at the time of a Medicaid recipient's death and that flowed into her surviving spouse's estate. In re the Estate of Grote (Minn. Ct. App., No. A08-1691, June 2, 2009). Again, New Jersey has an expanded estate recovery statute, so Medicaid can recoup money it expended against joint assets when a person dies.
Trusts as Countable Assets for Medicaid - Irrevocable Trust Forbidding Distribution of Corpus Is Still Countable by Medicaid
The Massachusetts appeals court finds that although an irrevocable, income-only trust expressly prohibits distributions of principal, other provisions in the trust could conceivably permit the trustees to invade trust assets, and thus the trust is countable for Medicaid purposes. Doherty v. Director of the Office of Medicaid (Mass. App. Ct., Essex, No. 08-P-939, June 18, 2009). Again - trusts must clearly specify if the assets are not available to satisfy long term care needs.
Trusts as Countable Assets for Medicaid - Property of Trust That Bars Distributions That Interfere With Medicaid Eligibility Is Available Asset
An Illinois appeals court finds that a trust that prevented the trustee from making distributions if it would interfere with public assistance is an available asset for Medicaid eligibility purposes. Vincent v. Dept. of Human Services (Ill. Ct. App., 3rd Dist., No. 3-08-0096, June 18, 2009). Seeing a theme here? Trusts must clearly specify if the assets are not available to satisfy long term care needs.
Medicaid Annuity - Community Spouse's Post-DRA Annuity Purchase Is Not an Improper Transfer
An Ohio appeals court holds that the purchase of a post-DRA annuity by a community spouse is not an improper transfer of assets. Vieth v. Ohio Dept. of Job & Family Services (Ohio Ct. App., 10th Dist., No. 08AP-635, July 30, 2009). I expanded on this case and how it might apply in New Jersey in a prior post.
Trusts as Countable Assets for Medicaid - 10th Circuit Reiterates: States Need Not Exempt (d)(4) Trusts From Asset Calculations
Confirming an earlier decision, the 10th Circuit Court of Appeals rules that Congress left states free to count (d)(4)(A) and (d)(4)(C) trusts as available resources for Medicaid purposes. Hobbs v. Zenderman (10th Cir., No. 08-2099, Sept. 1, 2009). New Jersey considers so called (d)(4)(A) trust as non-countable assets so long as the State is the primary beneficiary upon death.
Medicaid Annuity - Annuity Purchase by Community Spouse Upheld in Federal Appeals Court Decision
In a much-anticipated decision, the Third Circuit Court of Appeals affirms a U.S. district court ruling allowing a community spouse to purchase a DRA-compliant annuity to protect savings from the costs of her husband's nursing home care. Weatherbee v. Richman (3d Cir., No. 09-1399, Nov. 12, 2009). I blogged about this excited development in an earlier post as New Jersey is in the Third Circuit so this case applies to our clients.

Image: Salvatore Vuono / FreeDigitalPhotos.net

Real Estate Tax Appeals - Filing Thresholds have Changed for 2010

Deirdre Wheatley-Liss — Thu, 11 Feb 2010 09:50:57 -0500

Real estate tax appeals for both commercial and residential property have been a hot topic. As the real estate market sinks, many taxpayers find that they are paying taxes on real estate due to assessments made when the value of the property was 20-40% higher.

Up to now if you wanted to file a tax appeal and property assessed up to $750,000, you would have had to have filed in the County Board of Taxation. Now, they have changed the law so that property assessed up to $1 million must also be filed at the County Board of Taxation.

The fear is that self service taxpayers will be unaware of the change, file in Tax Court, and then miss the filing date on the county level. There is no "oops" defense to missing the filing deadlines.

The law change took place in an amendment to Rule 54:3-21 through Assembly Bill 4313. The stated purpose of this change in law is to "decrease the overburdened Tax Court's caseload and allow these cases to be heard by county boards of taxation...".

Again, the critical issue is that if a person files a tax appeal in the wrong jurisdiction, you may be considered out of time to then re-file in the correct court of competent jurisdiction.

Specific questions on real estate tax appeals can be directed to my colleague Steve Loeb, Esq. in our Tax Department.

Image: Salvatore Vuono / FreeDigitalPhotos.net

Palimony Agreement must be in Writing - Concern for Caregiving Couples

Deirdre Wheatley-Liss — Thu, 04 Feb 2010 16:53:05 -0500

My colleague, Judson Stein, Esq. has brought be my attention a new law that came into being in the last days of the Corzine Administration requiring that in order for a palimony agreement to be enforceable it must (1) be in writing, and (2) be executed with the independent advice of legal counsel.

Stein advises in his announcement:

“Palimony” involves the right of an unmarried participant to a marriage-like relationship to seek support benefits when the relationship ends, whether because the couple breaks up, e.g., due to loss of affection or by reason of the death of one of the participants. Case law in New Jersey had allowed such claims of support – even if based only on implicit understandings derived from the circumstances of the relationship.

Now, as a result of the new law, such a claim will not be legally enforceable unless it is set forth in a written agreement made with the independent advice of counsel. Further, as the new law applies to those in a “non-marital personal relationship”, and as the new law makes no mention of civil unions or domestic partnerships, the impact of this new law on parties to civil unions or domestic partnerships cannot be stated with certainty.

Given that many couples are not legally married (and, New Jersey does not recognize common law marriage), it is now more important than ever for unmarried couples to consider, and make provisions for, the financial consequences of the termination of their relationship – whether while both are living or when one dies. This is especially true when one of the couple is more financially dependant than the other or when their finances are intertwined.

I also find this of particular concern for caregivers. It is not uncommon for elderly couples to be in a relationship but not married. One reason to avoid later life marriages is that spouses are fully responsible to spend their assets towards a spouses care before Medicaid will pay for long term care. However, a long term couple may make promises to each other with regard to sharing in the estate for caring for a person. These agreements must now be in writing with the advice of counsel to be enforceable. Your typical couple will not be aware of this and I question if this law could now hurt caregivers since their agreements will normally be verbally and thus while morally binding, not legally.

Heckerling Institute - An Estate Planners Dream Week

Deirdre Wheatley-Liss — Fri, 22 Jan 2010 09:16:14 -0500

Depending on your passion, March Madness, Fashion Week or the Indianapolis 500 could be what you look forward to immersing yourself in every year. For estate planners, we look forward to the annual Heckerling Institute sponsored by the University of Miami School of Law. For one week each January it is chance to go back to the classroom, and immerse yourself in what is working, what is not, a what is on the horizon for estate planning and tax law.

So next week I will be in Orlando as a student to refresh my knowledge, renew the creativity bank and reconnect with the theoretical of the law as opposed the practical day to day. I will be tweeting updates to #heckerling and posting my thoughts about new and old techniques in the weeks to come.

This is a great opportunity to pick others minds, so comments about what you would like to know would be welcome. I am sure lots of commentary will focus on what to do in our 365 days of estate tax repeal.

Should a Loved One be Driving? Ask the DMV Medical Review Unit

Deirdre Wheatley-Liss — Tue, 19 Jan 2010 11:50:32 -0500

I often have spouses or children expressing concern about a loved one driving. This stems from a real fear that as a person gets older, suffers from dementia, or is being treated for a medical condition, their reflexes and judgment may slow. While these conditions are difficult on their own, they can lead to tragedy if the person suffering from reduced abilities is behind the wheel of a car. They could damage property, or more importantly, injure or kill themselves or others.

What is a family to do? In New Jersey a family member, physician, judge or police officer can request a Medical Review of the persons license and right to drive through the Medical Review Unit of the Motor Vehicle Commission (still the DMV in my mind).

This is a serious step as it could lead to a person's loss of freedom of movement. It cannot be done anonymously - the reported driver will be advised of who sent the letter. However, it allows family members a means to partner with experts in determining if it is safe for a loved one to be driving.

To request a Medical Review you must contact the Medical Review Unit in writing and provide them with the following information:

If you see these signs and want to request a medical review

Write a letter to MVC (must come from a family member, physician, judge or police officer):

Provide as much of the driver's information as possible: name, date of birth, address, driver license number and medical condition(s)

Include your relationship to the driver

Report the signs of impairment and safety concerns you have observed (see chart above)

Anonymous reports cannot be considered. Upon request, drivers will be told who reported them

If MVC's Medical Review Unit determines that a suspension or restriction is necessary, they will contact the driver by mail

Randolph NJ Schools Possibly Failing - Why?

Deirdre Wheatley-Liss — Mon, 18 Jan 2010 13:13:30 -0500

Randolph NJ, where I live and our son goes to school, is a typical suburban neighborhood in Morris County, NJ - the 5th wealthiest county in the country according to Wikipedia. We moved there in large part because of the supposed quality of the public school education.

Its school budget time of year again, and the news in New Jersey is not good. We are facing a $9,000,000,000 (that $9 billion) deficit in the state, and a minimum $2,000,000 deficit in the Randolph School budget (out of a total budget of about $76 million). All the news I have been hearing is how we need to do with less this year - but I was thinking that we have good, strong, solid school system, we just need some belt tightening.

Well, imagine my surprise to read a Daily Record article that we have a FAILING school system. That's right, Randolph High, Randolph Middle and one of our Elementary schools "received an "early warning" for a one-year lapse in reaching testing requirements." Now, I am not here to debate No Child Left Behind and the testing it mandates (I am not a supporter). However, it is the law of the land, and effects how our public schools are funded and operated.

One of the more disturbing things about this is that I had to learn of my child's failing school district from the newspaper - nothing was sent to parents or township residents, and it is not on the school district news page.

I am not an educator - I don't know what the issues are from their perspective. I am not being critical of the test scores, they are what they are, and are good in the sense that they highlight what are clearly issues in the Randolph NJ education system. However, I am a parent and a taxpayer, and feel that it is reasonable to expect that a school district of Randolph's supposed quality and significant funding not only meet minimum standards, but leave them in the dust in terms of the quality of education being offered to our children.

A conversation with Mike Huckabee on Tax Policy

Deirdre Wheatley-Liss — Thu, 14 Jan 2010 15:23:08 -0500

Today former Arkansas Governor and Presidential Candidate Mike Huckabee spoke at the Morris County Chamber of Commerce Annual Meeting. During a round-table session with Chamber's Board of Directors I had the opportunity to ask Governor Huckabee about his thoughts on our current tax system. Now, I am a self-admitted tax junkie - I am totally fascinated by how the tax system influences the economy and behavior and how little critical thought politicians on both sides of the aisle seem to give to it. So, I thought to myself, here is an opportunity to see what a former (?) politician would say about tax policy.

To paraphrase my question:

Governor Huckabee, here in New Jersey we are in the most expensive state to live in and the most expensive state to do business in from a tax perspective. How is it that the government's share in our work could be productive to our businesses instead of having a dampening effect?

Gov. Huckabee's first answer was to first invite me to move to Arkansas - apparently the tax environment is much friendlier. But all joking aside, he made some very insightful comments, which I thought I would summarize here:

Corporate Tax does not exist. He expressed amazement of the fundamental lack of understanding in the American populations that corporations do not pay tax, they collect tax. Think about it - when there is a new tax on oil companies, gas prices go up; on food companies, food prices go up; on banks, bank fees go up. Taxes are a cost of doing business that is passed along to the ultimate consumers of good and services - you and me.
A FAIR tax would jumpstart the economy. Gov. Huckabee said that he used to advocate a flat tax, but now advocates a FAIR tax. I have to say I am not a flat tax proponent (it is regressive - affects poorer people more as they must spend dollars on necessities - and anything to address the regressiveness takes away from from the simplicity of a flat tax) and I knew nothing about the FAIR tax until today. Gov. Huckabee explained it as a tax on consumption - you buy gas, you pay tax; you buy oil to make gas, you pay tax. It changes the tax from on productivity to one on consumption. He inspired me to go out and learn more - so more posts will be had on this subject. I will be visiting the FAIR Tax website today and reading The Fair Tax Book that Gov. Huckabee recommended.
Eliminate tax penalties for bringing offshore dollars into the US as an immediate solution to our fiscal crisis. Right now, if you make money outside the US, you are taxed when you bring it into the US and potentially subject to penalties of 50% or more if you haven't previously reported the dollars. Gov. Huckabee estimated 130 billion in offshore dollars that US companies and taxpayers won't bring back into our economy because it costs too much. Eliminate those taxes and billions will flow into the economy from sources other than the US taxpayers pocket.

Gov. Huckabee shared that when he discussed the fair tax with his accountant he thought the accountant would dismiss the idea because it would put him out of work. The accountant replied that he would like the idea where he could spend his time helping companies build their businesses instead of figuring out what their fair share of tax is. I will read more on the subject and see if I agree.

Undue Influence in a Will Contest or Estate Administration

Deirdre Wheatley-Liss — Tue, 12 Jan 2010 08:29:38 -0500

I received a call yesterday similar to many others I have received over the years. Essentially, Dad died and the client just found out that shortly before his death he named one child beneficiary of lots of accounts, leaving essentially nothing passing under the Will, which had divided everything equally between 3 children.

Lou Ann Anderson, the Bell County Legal News Examiner has an article today about celebrity cases of undue influence. The stories are similar - shortly before death a new Will is executed or other property transfers done that undo a lifetime of the decedent's intent. These cases include Brooke Astor (her son and attorney were sent to jail for trying to defraud hundreds of millions from charity), Melvin Simon of Simon Shopping Malls fame (his Will months before he died was changed to leave all to his wife, and take out $150 million in bequests to charities), John "Buck" Jones, owner of the Carolina Panthers (his Will was changed a month before his death to leave control of Company to his wife instead of 3 employees as had been his long standing plan).

While these celebrity cases are titillating because of the names and dollar amounts involved, the same situation involves New Jersey families all the time.

There are competing concerns. First, a person is free to leave their money to whomever they please (other than 1/3 to a spouse) - children do not have a right of inheritance. Second, a person is not required to leave money equally among a group - many times one child gets more in the Will than others because the parent perceives that child's need or reward to be greater.

However, it is the person making the gift who is allowed to make these decisions - not the person getting the gift. The problem of undue influence arises when somebody essentially takes advantage of a person's reduced physical or mental state, or a situation of fear or dependency, and influences them to make an action they would not have otherwise takes.

The issue for a person who is claiming undue influence cases is one of proof. How do you prove a person was influenced to make a change to their estate plan and it was not an independent decision? There need to be witnesses and documents. Do you have to prove the undue influence, or does the person who got the money have to defend the gift? Kenneth A. Vercammen, Esq. has an excellent summary of the issues in Undue Influence As Defense To Will Or Power Of Attorney (New Jersey).

Generally, the person claiming undue influence (ie, the person getting less) has the burden of proof to show a court there was undue influence. See Conners v. Murphy, 134 A. 681, 682 (N.J.Err. & App. 1926); Pascale v. Pascale, 549 A.2d 782, 786 (N.J.1988). However, if the the person who benefited from a gift is in a confidential relationship with the person who made the gift (an attorney in fact under a POA, a person who the person who made the gift is dependent upon), then the burden of proof shifts to the person who got the gift to prove that the person making the gift had independent counsel in making the gift. See Haynes v. First National State Bank of New Jersey, 432 A.2d 890 (N.J. 1981); Pascale v. Pascale.

The presumption of undue influence is easier to raise with lifetime transfer then with transfers in a Will. Some lessons from this are that if you think that you were harmed by undue influence, gathering facts and acting quickly is key. If you plan to disproportionately benefit your heirs, you should seek legal counsel to act to protect that gift from a claim of undue influence.

Image: Simon Howden / FreeDigitalPhotos.net

No Estate Tax in 2010 - What Opportunities Might there be?

Deirdre Wheatley-Liss — Mon, 04 Jan 2010 07:56:38 -0500

My two prior posts have been about the federal tax impact for single individuals who die in 2010, and the federal tax impact for married individuals. In summary the results for singles were not good, and for marrieds were worse – the "death" of the estate tax creates a capital gains "trap" for survivors. While all this will be moot if Congress does as they have promised and create an estate tax retroactive to January 1, 2010, they haven’t acted yet, and as of January 1, this is the law.

What planning can be done in this environment?

Can you just say “whoo-hoo”; I’ll give everything to my children. Hold on there – the federal estate tax is repealed in 2010, not the federal gift tax. Each person still has a lifetime exemption of $1,000,000 – if you make gifts in excess of that in 2010, you will be subject to the federal gift tax at a rate of 35%.

However, the generation skipping tax (“GST tax”) is repealed in 2010. The GST Tax essentially says that you can only leave up to $3.5 million to grandchildren without paying a separate tax of 55%. The theory behind the GST Tax is that the government should share in the wealth at each generation. If grandma leaves everything to granddaughter, the IRS might need to wait 75 years until tax can be collected again. If assets go the children, the IRS might only have to wait 30 years to tax again. So, in 2009 you could leave up to $3.5 million to grandchildren without GST tax. In 2010, you can leave everything to grandchildren without an additional tax. For wealthy families, this could mean a huge amount passing to lineal descendants with the only tax cost(s) being capital gains (click here for an explanation of the 2010 capital gains tax trap for estates).

The estate plan you had in 2009 and will need again in 2011 won’t really make sense in 2010 unless they make the estate tax retroactive. Do you need to go out and totally revise your plan? Not necessarily. If you have a terminal situation however, it definitely bears looking at your current plan to make sure it addresses how to plan to minimize capital gains taxes instead of estate taxes.

Gifts to grandchildren may be a winning strategy in early 2010. Also, for anyone who is terminally ill, a change of an estate plan to leave assets to grandchildren may be a winner as well (although if the estate plan isn’t changed, disclaimers may be able to be employed by the children to a similar effect). And it will bear looking at the estate plan of anyone who is terminally ill.

Image: Danilo Rizzuti / FreeDigitalPhotos.net

"Death" of Estate Tax in 2010 creates Tax Trap for Spouses

Deirdre Wheatley-Liss — Thu, 31 Dec 2009 08:02:32 -0500

My prior post was about the federal tax impact for single individuals who die in 2010 (unless Congress does as they have promised and create an estate tax retroactive to January 1, 2010 – we will have to wait and see if that happens and how it is constructed).

The news for single folks was not good. Mom dying with a $3.5 million estate in 2009 could leave it to son tax free. Mom dying with that same $3.5 million dollar estate, assuming the basis of her assets is $350,000, now creates a federal capital gains tax of $277,500 for son (or $416,250 if he is in NJ).

The news for married folks is worse. In 2009 mom could leave $100 million (or whatever amount) to dad with no taxes whatsoever – there is an unlimited marital deduction from estate taxes (so long as your spouse is a US citizen). In 2010 only $4,300,000 will pass tax free to the surviving spouse.

The "death" of the estate tax creates a capital gains "trap" - and the “trap" catches assets passing to a surviving spouse that were never subject to tax under the estate tax.

What??? you say. How is it possible that by eliminating the estate tax you are creating a tax for widows and widowers? As I noted, due to the magic of Internal Revenue Code Section 1014, capital gains taxes disappear at death under the 2009 law. Section 1014 creates a “step-up in basis” by stating that when an estate is subject to estate taxes, the cost basis of inherited assets is the date of death value. For example, mom bought stock for $10, and when she dies it is worth $100. Dad inherits stock and sells for $100. His capital gains is $0 ($100 of value - $100 of basis =0).

However, in 2010 there will be no estate tax, and therefore no “step-up in basis”. Instead, per Section 1022, Dad can apply $1,300,000 million plus $3,000,000 to add basis to the assets that mom has. How might this work? Let’s say mom has a $6 million estate, made up mostly of the family business she and dad still work in and some real estate. Assume mom has a $500,000 basis in the assets – all that appreciation has been due to increases in value over the years. If mom died in 2009, dad would get $6 million tax free. If mom dies in 2010, and dad sells everything since he doesn’t want to work without his life partner, he only has a basis of $4,800,000 ($500,000 of mom’s basis + $4,300,000 of allocated basis). Since he sold for $6 million, he has $1,200,000 of capital gains. He will owe the federal government $180,000, and if he lives in New Jersey, he will also owe the Garden State $90,000, for a total of $270,000. Remember, had mom died in 2009 when there was an estate tax in place, dad would have owed $0.

It bears repeating that all other concerns aside, this new tax regime where you need to track cost basis over a life time is a nightmare. How do you prove mom’s basis before she died was $500,000? Was every improvement tracked? What documentation will the IRS accept as proof? Will you have that documentation 30, 40, 50 years later?

My next post will address some planning opportunities (every cloud has a silver lining after all) that might exist in this new tax environment.

Federal Estate Tax "Death" in 2010 Creates Capital Gains Trap

Deirdre Wheatley-Liss — Wed, 30 Dec 2009 09:09:02 -0500

Sigh ... I was really, really hoping I would not have to post about what happens to those who die in 2010 from a federal tax perspective. However, since Congress couldn't seem to get its act together, here is the current 2010 landscape (with the caveat that Congress can act in 2010 and have a retroactive estate tax - but, we will have to see what happens when it happens).

Did you know that the "death" of the estate tax creates a capital gains "trap"? And that "trap" catches the smaller estates, the ones that under current tax laws have no federal tax consequences on death.

Assume you are single person with a $3.5 million estate (I will post separately about married couples). Had you died in 2009, there would have been no federal tax consequences to your death. If you die in 2010, there will no federal estate taxes (same as 2009). However, your heirs will have to pay capital gains taxes (see, there is always a catch).

What??? you say. I thought death was tax free in 2010. It is estate tax free, there won't be a federal estate tax. There will, however, be federal and state capital gains taxes for deaths in 2010. Why??? you ask. Well, there is a pesky little section of the Internal Revenue Code (1014) that says, essentially - when an estate is subject to estate taxes, the cost basis of inherited assets is the date of death value. For example, mom bought stock for $10, when she dies it is worth $100. Son inherits stock and sells for $100. His capital gains is $0 ($100 of value - $100 of basis =0). Section 1014 is a neat magic trick - it makes capital gains taxes disappear. In tax parlance we call this a "step-up in basis".

However, in 2010 there will be no estate tax, and therefore no step-up in basis. Let's take the same example where mom bought stock for $10, and when she dies it is worth $100. Son inherits stock and sells for $100. He now has a capital gain of $90 subject to tax ($100 of value - $10 of basis = $90). He must pay federal capital gains tax on this amount (15%) and state capital gains tax (7.5% in New Jersey) for a total tax of $20.25 if he is in NJ - or $15 if he is in FL or another state without a state estate tax.

Notice that when mom died in 2009 with an estate tax in place, son netted $100. However, when mom dies in 2010 with no estate tax in place, son only nets $79.75. Lets add some zeros - son nets $1,000,000 if mom dies in 2009, but only $797,500 if she dies in 2010. Now you see how no estate tax is not necessarily a good thing?!

The above is over-simplistic, but it makes the point that the "death" of the estate tax creates a capital gains trap.

One point of "relief" - your estate will be able to allocate $1.3 million to add basis to inherited assets (different rules apply for a surviving spouse) per code Section 1022. To continue our example, mom's entire $3.5 million estate consists of stock she bought for $10 a share and is now valued at $100 a share. Her cost basis in her estate is $350,000. She dies, and the estate has an additional $1.3 million of basis - so the stock now has a total basis of $1,650,000. Son sells the stock for $3.5 million, creating a capital gain of $1,850,000, which in return has son paying a federal capital gains tax of $277,500 (or $416,250 if he is in NJ). Remember now, if mom had died in 2009 when there was a federal estate tax, son would have paid $0 in tax.

But the the so called "relief" is a trap too - how are you going to prove basis? How do you know what mom paid for each stock share? And if you do know, what about splits, mergers, stock dividends - what is her cost basis in all those? Tracking basis for assets acquired over a person's lifetime, particularly when the person is now dead, is a nightmare.

Congress has "promised" to reinstate the estate tax to January 1, 2010 - and I think we all know what weight to give to Congresses promises.

My next post will address what happens if mom dies in 2010 survived by dad (a spouse) - and the picture isn't rosy there either.

Yes, there is a Santa Claus

Deirdre Wheatley-Liss — Wed, 23 Dec 2009 09:43:51 -0500

Happy Holidays to you all!

In this time of family, friends and thanks for good fortune, I like to recall a very famous letter written by 8 year old Virginia in 1897 to the to the New York Sun asking "Is There a Santa Claus?" for her father had told her that if it was printed in the New York Sun it must be true.

The editor, Francis Pharcellus Church, created a response that 100 years later still embraces the magic of children, joy, and hope for the future. My favorite part:

Yes, Virginia, there is a Santa Claus. He exists as certainly as love and generosity and devotion exist, and you know that they abound and give to your life its highest beauty and joy. Alas! how dreary would be the world if there were no Santa Claus! It would be as dreary as if there were no Virginias. There would be no childlike faith then, no poetry, no romance to make tolerable this existence. We should have no enjoyment, except in sense and sight. The external light with which childhood fills the world would be extinguished.

I wish you the joy of seeing all the Santa Clauses who abound in your life this holiday season.

- Deirdre

Image: Salvatore Vuono / FreeDigitalPhotos.net

More Tax Provisions than the Estate Tax Expiring December 31

Deirdre Wheatley-Liss — Wed, 23 Dec 2009 09:10:41 -0500

Derek Jensen of Jensen Law Offices reminds us in his blog that the Estate Tax is not the only federal tax provision expiring on December 31 due to Congressional inaction this year.

The estate tax isn't the only tax provision expiring on Dec. 31. Due to congressional inaction 50 tax provisions will expire. Including the annual AMT patch, the deduction for state and local sales taxes, the $4,000 deduction for college tuition, a provision that allows taxpayers age 70-and-a-half or older to transfer up to $100,000 directly from an IRA to charity, the business R&D credit, and a biodiesel tax credit. Many of these provisions require action every year and they are likely to be extended again, but retroactively this year.

As a tax professional I find in mindboggling that Congress, whose constitutional mandate (Article 1, Section 7)is to make and pass tax laws "All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills" can't bring themselves to do their jobs.

I know there is a lot going on in Washington, but these tax provisions all have a 1 year life, and Congress knows that they therefore must act on them every year. It is not as if the tax code is a small deal - it is only the means by which the federal government makes the money they spend. It is lazy to say "we'll do it next year and make it retroactive" because what if you don't? How can a person or business plan how to allocate their dollars when the tax laws that share in those dollars are in limbo? How can a business plan to invest in new research when they can't budget what it will cost them because they don't know if the Research and Development credits will exist? Why should 23 million more American's have to worry if the AMT may catch them this year (or just be surprised by it) because our elected representatives can't get around to passing the annual patch that resets the income levels?

All of us are working harder, doing more to meet our responsibilities - Congress should be held responsible to to make the time to meet their responsibilities and this nonchalance about doing their jobs should not be ignored (like they are doing to the tax code).

Estate Tax - Repeal and Retroactive Reinstatement Now Seem Likely

Deirdre Wheatley-Liss — Wed, 16 Dec 2009 12:49:56 -0500

I had previously reported that a one-year extension of the federal estate tax seemed likely in an end of year defense spending bill. Now, Hani Sarji reports that it is likely Congress won't act this year, but will act next year and reinstate the estate tax to January 1, 2010 in some form.

In Estate Tax Fix Fails, Repeal Likely - US Lawmaker (Dow Jones Newswires, 12/15/09), Martin Vaughan reported the following:

Rep. Earl Pomeroy (D., N.D.), said plans to include a temporary estate tax extension in end-of-year defense spending legislation have been dropped because of Senate opposition.

As a result, he told Dow Jones Newswires, the estate tax will be repealed on Jan. 1 as foreseen by current law, and replaced with an onerous capital gains tax that heirs would have to pay when they sold any inherited assets. . . .

It is regrettable that we're going to have this disruptive period without a permanent resolution," Pomeroy said.

But he said "the prospects are 100%" that Congress will come back next year and reinstate the tax, and make it retroactive to Jan. 1, 2010.

My issue with repeal and retroactive reinstatement is what happens to the person who dies before the reinstated law is passed? From a planning perspective, I know Congress won't leave well enough alone, and the reinstated law will not be identical to the current law, which means that for the person who dies during the gap time will have lost an opportunity to fully plan their estate. See a prior post on my other thoughts on retroactive estate tax reinstatement.

Image: Salvatore Vuono / FreeDigitalPhotos.net