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2010 Estate Tax Laws: A Mid-Year Update

Courtesy of Armstrong, Fisch, & Tutoli Attorneys at Law · July 14, 2010 ·

2010 has been one strange year for the U.S. tax code. We have a huge estate tax issue that is still not fully resolved. Let’s take a look at where things stand for the estate tax year in terms of changes, amendments, additions and considerations.

The estate tax and GSTT have been repealed for 2010, but they may be enforced retroactively.

Even though the Obama administration preferred having an estate tax in 2010, Congress was preoccupied with other matters as 2009 drew to a close. So no action was taken, and as EGGTRA stipulated in 2001, the estate tax is 0% in 2010. [1]

So far, anyway. The longer we go with no action taken, the harder it gets for Congress to take action and put a retroactive estate tax in place. (You could easily argue that a retroactive estate tax would be unconstitutional.)

Of course, the estate tax and the generation-skipping transfer tax (GSTT) are scheduled to return in 2011. Congress may restore things to 2009 levels, $3.5 million exemption for estate tax and GSTT with 45% estate, GSTT, and gift tax rates. By doing nothing, though, estate taxes would reset to pre-EGGTRA levels in 2011 (the exemption level at just $1 million with 55% estate, GSTT, and gift tax rates). [1]

With no estate tax in place for 2010, the step-up basis rules have been replaced by carryover basis rules.

This year, assets in an estate are subject to capital gains taxes when sold based on the original price paid for the asset. This could mean some big problems for heirs if an asset was bought by Mom or Dad 20 or 30 years ago. Let’s say the asset is a stock. If Mom or Dad purchased shares off and on through the years, you’ll have quite an assignment to find that paper trail, and you may end up paying capital gains tax on the appreciation if the estate is really large. Fortunately, each estate can exempt $1.3 million of gains from the carryover basis rule, and another $3 million exemption applies to assets inherited from a spouse – so as much as $4.3 million of an estate, if transferred to a spouse, can retain the step-up in 2010. [2]

The federal gift tax rate is 35% for 2010, not 45%.

Yes, there is still a gift tax in 2010 on gifts above the lifetime exemption amount of $1 million. However, the tax bite is just 35% for 2010. Of course, if you end up gifting less than $1 million during your lifetime, you won’t have to worry about the gift tax at all but you will need to be sure to file a gift tax return.[3]

IRS CIRCULAR 230 DISCLOSURE: Tax advice contained in this communication (including any attachments) is neither intended nor written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code or to promote, market or recommend to anyone a transaction or matter addressed in this communication.

[1]moneywatch.bnet.com/retirement-planning/article/estate-tax-what-you-need-to-know-for-2010/378294/ [1/5/10]

[2] articles.moneycentral.msn.com/RetirementandWills/PlanYourEstate/5bigMythsAboutTheEstateTax.aspx [4/14/10]

[3] moneywatch.bnet.com/retirement-planning/blog/financial-independence/why-is-everyone-afraid-of-the-gift-tax/843/ [4/14/10]

Understanding the Role of the Trustee

Courtesy of Armstrong, Fisch, & Tutoli Attorneys at Law · July 12, 2010 ·

If you have been named as trustee of a trust , you may find that the job isn’t quite as easy as you thought it would be, especially if you have multiple beneficiaries and/or difficult heirs.

In fact, it is a common misconception that the biggest task of a trustee is the financial aspect of their role, but in reality the people that the trustee deals with can be just as much of a challenge.

How to Make Your Role as Trustee Easier

One of the most important things you can do in your role is to communicate with the beneficiaries of the trust. Most people don’t have a clue as to how a trust works, or what a trustee does. Due to the fact that a beneficiary may not understand the mechanics of a trust and your role as trustee, they could be uncooperative. Without the cooperation and support of the beneficiaries of the trust, the trustee’s job can be a lot more difficult than it has to be.

There are some steps you can take to ensure that you and the trust’s beneficiaries are on the same page.

The first thing you will want to do is contact the beneficiaries of a trust as early in the process as possible; at this point do everything you can to educate these people as to what your role of trustee entails. Be upfront with the beneficiaries on subjects such as how long it is likely to take to administer the trust, and always answer questions in a courteous manner. It is also important that you not try and hide the trust document or any of the assets from the beneficiaries, as this will create distrust.

Although the law does require that a trustee keep beneficiaries informed on what is happening with the trust, you will want to do at least this much and a lot more. Look at the beneficiaries more like partners, and they will be a lot happier with how you are handling your role.

Keeping beneficiaries informed is vital; anytime that you take an action that will have an effect on the beneficiaries, you will want to let them know. If you do want to take action and you know that it is not something a beneficiary wants to do, it is a good idea to either get written permission from the person prior to taking action, or to go to court and get approval from a judge.

If you are both a trustee and a beneficiary of the trust, you will have to take extra precautions against potential disputes. It is important that you are fair with all beneficiaries and you will not want to take any action with the trust that you might benefit from at another’s expense.

What’s the Difference Between a Solvent and an Insolvent Estate?

Courtesy of Armstrong, Fisch, & Tutoli Attorneys at Law · July 9, 2010 ·

When a person passes away there are usually some bills to be paid by the estate. There might be medical bills, credit card bills or even purchases. If you have been named the Personal Representative of a loved one’s estate, then you’ll need to understand how you will tackle these bills. Of course, you’ll have the guidance of your attorney, but it’s good to have a basic understanding of how debt works when it comes to probate.

Pending payments for bills are known as debt in legal language. Comparing the amount of debt carried by an estate to the amount of estate assets tells you whether the estate is solvent or insolvent.

What is a Solvent Estate?

A solvent estate includes enough assets for paying off all bills. The assets are more than the total value of the bills. The Personal Representative is responsible for paying off the bills. At the end of probate, 12 – 18 months in CA, once all legitimate expenses are paid – including clearing all debt – then the assets are distributed to the beneficiaries. The Personal Representative has to ensure that the beneficiaries receive their share.

What is an Insolvent Estate?

In an insolvent estate, the assets are not enough for paying off all bills. When an estate is insolvent, then the Personal Representative has to list all bills in order of priority in accordance with state law. Your attorney can explain how to prioritize the bills. The assets would then be used to pay off bills – wholly or partially. Those bills that cannot be paid would have to be written off as bad debt. Beneficiaries are not responsible for paying off an estate’s debt.

Naming a Guardian for Your Child

Courtesy of Armstrong, Fisch, & Tutoli Attorneys at Law · July 9, 2010 ·

If you have a children who are minors then it is very important to name a guardian for them in your Estate Plan. You need to make arrangements so that your child is looked after properly in case both you and the child’s other parent pass away before your child reaches adulthood.

The process of choosing a guardian can be especially difficult. Your attorney may be able to guide you in choosing an apt guardian but here are some basic points to keep in mind:

Where does the guardian live?

In most cases your child would need to move where the guardian lives. Very rarely do adults relocate to look after minor children, so if you don’t want your children to have to move away, you’ll want to select someone who lives near you.

What are the religious, political and moral beliefs of the guardian?

This is probably the most important factor in choosing a guardian for your child. In the unlikely event of your death, you would not want your child to grow up with different values than your own. Guardians will have a great deal of influence over your child, so it’s important to keep their religious, moral and political beliefs in mind while making a selection.

Is the guardian responsible?

Do you think your potential guardian would love your child and look after them properly? Do you think he or she has the right parenting skills? Can the guardian balance discipline and nurturing in a way that will work for your child?

How old is the guardian?

You need to name an adult who is not too old to keep up with your child. You want to make sure that whoever you choose will be physically able to take care of your child. Also, you may want to consider the fact that an older guardian might be out of touch with latest issues relating to parenting and children.

What is the guardian’s family situation?

Consider whether the potential guardian’s family situation would allow him to look after your child properly. Would he be able to give time to your child or does he already have too many personal family responsibilities?

Acceptance by the guardian

Be sure to ask the potential guardian if he would be willing to take on the job. It is no use naming someone without asking them first. Some people might not be ready to shoulder the responsibility.

Estate Tax News – Responsible Estate Tax Act S. 3533

Courtesy of Armstrong, Fisch, & Tutoli Attorneys at Law · July 7, 2010 ·

Last week several senators introduced a bill to continue last year’s estate tax provisions for this year and into the future, retroactive to January 1 of this year.

This bill would reinstate last year’s $3,500,000 per person exemption from the tax, and restore the 45% tax rate on amounts over that for estates up to 10 million. The tax rate increases for estates over 10 million, with an additional surtax on estates over 50 million. It would also reinstate the full step up in basis on appreciated assets held by a decedent. Although the different provisions for very large estates, result in a high tax for those decedents, if passed, the bill would be very good news for many estates that would otherwise be taxable next year with a scheduled $1,000,000 exemption and 55% tax on the excess.

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