Archive for November, 2010

In a few short weeks many more estates will be taxable. Here’s a summary of what the “sunset” of current tax law provides and what you need to know about how these changes will affect you and your family.

In 2001 Congress  restructured the estate tax laws  and passed a “temporary” ten year plan with a new estate tax structure.

In this ten year plan, the exemption for each person increased each year or two over the decade – until next year when EGTRRA sunsets and the tax rate goes back to what it was before EGTRRA

These annual changes to the exemption remind me of that well-known adage from Ben Franklin – “nothing is certain but death and taxes”. This has never been more true than now.

Here’s a recap of estate tax law for the past ten years. In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) imposed gift, estate and generation skipping taxes depending on the size of the gift or the size of your estate at death.

In 2009, the estate tax and generation skipping tax (GST) exemptions were both $3.5 million, the lifetime gift exemption was $1 million and the annual gift exclusion was $13,000.

On January 1, 2010, the estate and GST taxes were repealed. The gift tax rules remained unchanged except the gift tax rate dropped to 35%. But beginning in January – less than 5 weeks away- this same law (EGTRAA) provides that next year we go back to the past. For 2011, the estate tax exemption will only be $1 million. That means that many more estates will be paying estate taxes with a top rate of 55% of amounts over $1 million.

In the past ten years, tax experts and commentators almost without exception assumed that Congress would pass a new tax law to replace EGTRAA when it expired and that it would do what was originally intended – come up with a replacement for the law that reverts back to the  $1 million exemption.

Now commentators have reversed those predictions and most think it is very unlikely that a lame duck Congress will pass a new tax bill before 2011. It is also clear that if and when a new bill is passed, we can count on more changes after that. This means, more than ever, you will need to have your estate plans reviewed regularly.

For some couples who formerly were in no danger of paying federal estate tax, taking advantage of a basic plan that gives each spouse $1 million exempt for taxes ( and therefore doubles their exemptions for the family) is adequate protection.

For other people, additional tax planning will be needed to “redirect”  taxes to your favorite charity or family members.

Blended families face challenges and complexities in finding a way to leave assets to their spouses, stepchildren, children from  previous  marriages,  ex-spouses,  and  other  various people who become “family” when two existing families are combined.

A particularly painful, often overlooked, problem for blended families is:  if you remarry, where are you buried after  you  pass  away?   Will  your  children  reunite  you with your first spouse?  Or will your second spouse bury you in a new  plot  where  he  or  she  will  join  you  in  the  future? Whichever  the answer,  there  is a high probability  there will be a fight about it!

Even the Kennedys Have This Problem.

Jacqueline  Kennedy  Onassis  is  buried  next  to  John  F. Kennedy,  not  Aristotle  Onassis.  Writer  Jack  Kerouac remains buried by his third wife, but only after his daughter from his second marriage lost her fight to disinherit him. Seem a little extreme?  Some funeral directors claim fights such as this occur at least once a week. Over 40% of marriages  today have  a  spouse who has been previously married.

In a recent situation, a son was fighting with his  father’s new  spouse  about whether  to bury his dad next  to  his  deceased  mother,  or  in  a  plot  where  his  new stepmother  would  one  day  rest  beside  him.  In Michigan, where  this  case  occurred,  the  law  lets  the  current  spouse make the burial decisions, so the stepmother won.  However, the funeral director informed  the son that once his step mom passes  away,  he  becomes  his  father’s  next  of  kin  and  can legally disinter him  and move  the body.

The  son promptly told his stepmother that she could bury his dad wherever she likes,  but  he  will  move  the  body  as  soon  as  she dies. Realizing her  loss of control,  the  stepmom agreed  to  let her husband be buried next to his first wife, and refused to attend the  funeral.   This  example  shows how  complicated blended family issues can become.

The Law Preempts?

Even  people  who  write  down  burial  instructions  can  get foiled by  the  law. The  surviving  spouse  is  allowed  to make the burial decision in 60% of states.  Some states have passed laws  to  allow written  burial  instructions  by  the  decedent  to prevail.  Illinois  and  Kansas  let  you  designate  someone  to make your funeral arrangements for you.  This was partially in  response  to  situations where gay  lifetime partners had no legal ability to influence funeral arrangements.

To complicate matters, religious beliefs can also direct burial arrangements.  For example, the  Jewish  custom  is  that  if  a  deceased person does not leave any instructions, they should be buried with the person with whom they had children.

To some, being buried in a military cemetery carries great prestige  and honor. The  family of  a veteran  is  allowed  to be  buried  in  the  cemetery;  however,  if  the  veteran remarries, the first spouse may lose that right even if his or her children are buried there.

A Growing Issue

As the number of blended families continues to grow, this issue  will  become  more  and  more  common  and  will continue  to  tear  families  apart.  Some  current  suggestions from  funeral  directors  are:

Cremation, which  enables  the deceased’s  remains  to  be  divided  between  spouses  and children;

Have the new spouse purchase a burial plot in the same vicinity as the deceased and his/her previous spouse;

Leave  written  instructions  (though  not  always  legally binding,  the  families will often  adhere  to  them).

Dealing with these  often  overlooked  issues  in  a  thoughtful  and  caring way  will  enable  blended  families  to  think  them  through before  they  result  in  hurtful  confrontations.

While her notoriety was scandal for the tabloids, the starlet’s estate planning battles and mistakes can be used as a teaching tool with clients.

Anna Nicole Smith, former exotic dancer turned fashion model, Playboy Playmate and reality TV start died of  a drug overdose in 2007. Though Smith is gone, she hasn’t faded from the headlines. News agency Reuters recently reported that her estate continues a longstanding fight with the estate of her late oil baron husband.

Will Neglects to Mention Wife

In 1994, Smith married Texas billionaire J. Howard Marshall. She was 26, and he was 89. He died 14 months later, leaving an estate worth $1.6 billion. Marshall’s will left nearly all his money to his son Pierce Marshall and nothing to Smith. She challenged the will, claiming he promised her more than $300 million.

This month the Supreme Court said it would decide whether Smith’s estate deserves part of Marshall’s estate. The court is expected to hear arguments early next year, with a decision likely by June.

Everyone’s Dead but the Lawyers

This marks the second time the high courts has agreed to consider the case. The earlier ruling in 2006 only addressed whether federal courts can decide Smith’s claims, not the merits of her arguments.In March, a U.S. Appeals Court in California ruled against Smith’s estate. It was a victory for the estate of the late Pierce Marshall, who died in 2006.

The current issue for the Supreme Court in the latest appeal involves whether the appeals court improperly limited the power of federal bankruptcy judges in considering such claims.

And Baby Makes Beneficiary?

Smith’s will, drawn up in April 2001, named her son Daniel as the sole beneficiary of her estate, specifically excluded other children, and named her lawyer, Howard K. Stern as the executor. Daniel had died before Danielynn was born so she ended up being the default sole heir. The now 4-year old child stands to benefit if the Supreme Court rules in Smith’s  favor on the claim against Marshall’s fortune.

Remarriage is commonplace these days, even for older seniors. From the legal battle over the oil tycoon’s estate to the lack of planning for her newborn daughter, this real-life soap opera is full of lessons for non-celebrities as well.

It always seems that  it’s the “wealthy” pets who capture the headlines. You might remember the story of  Trouble, a Maltese doggie who inherited $12 million from her owner, Leona Helmsley. A judge later reduced Trouble’s bequest to $2 million but the publicity contributed to a public perception that only eccentric millionaires make plans  for their pets.

The truth is many people consider our pets to be an important part of our household and would feel terrible if  the pet were left stranded, abandoned – all because we didn’t make any plans for them  in case some disaster or sudden death strikes.

Luckily, it’s not difficult to find the right way to include these furry-coated animal family members in your life and estate plan. Without a plan, your loyal companions could end up in a shelter, where they would be euthanized or donated to research labs if they are not adopted.

Here are some simple steps that can make a huge difference for the pets you love.

You should  designate someone who likes animals (and in particular  your animal) to be the caretaker. In the document this caretaker would  be described as the trustee  for the pet. Usually it is someone who wants to care for your pets and understands their needs.

Make sure you name at least one backup choice in case the first choice becomes unable to serve. Your pet trustee will often not be the same persons who will inherit your assets or handle the estate administration.

Build in some financial assistance for the job. On average a dog costs a bit more per year that a cat ($1,400 compared to about $1,000). Horses cost much more and are also much more difficult to place.

Since horses are not easy to place, if you are a horse owner you may need to investigate organizations that can help with this task.  You could also decide to name someone you know to have the task of  finding a home for  even thought that person is not  the one providing the home.

In some states (although not in Massachusetts, yet)  it’s possible to fund a more formal special trust for a pet and the trustee need not be the person responsible for care.

In Massachusetts, where special trusts for animals have not been established by the Legislature, we would name the person designated to care for the pet (or for finding a home for the pet), specify our wishes and designate some money for a special sub-account to help the pet Trustee or agent pay for these expenses. It often is a good idea to build in some accountability and oversight for how the money is used.

You should include instructions on how the funds are to be used (food, veterinary care, pet sitters, grooming, etc.) as well as plans for interim care until long-term placement is completed.

A memorandum or letter to the caregiver can add helpful information and instructions for the pet.  This should include a complete medical record, feeding instructions, a list of favorite toys, and names of friends–both human and animal.

What happens if the pet owner becomes incapacitated or required nursing home care? Eden Alternative (edenalt.org) is a nonprofit that promotes the right of residents to have pets in institutional settings. Their website lists pet-friendly facilities around the country.

What if there is a natural or other disaster? The Humane Society’s website provides an excellent pamphlet and checklist that pet owners can use for disaster preparedness.

http://www.humanesociety.org/issues/animal_rescue/tips/disaster_preparedness_pets.html