Estate Planning Practice Blog

Estate Taxes

Most people don't realize that we have two systems of taxation. One taxes income as it's earned; the other taxes wealth as it changes hands. During a person's lifetime, we call this transfer tax the gift tax. At his or her death, we call it the estate tax, and it could carry significant tax consequences for you and your beneficiaries.

That's why estate planning is so important.

Should you worry about the estate tax?

Each state has its own rules for state inheritance taxes. And then there's the federal estate tax.  For 2007 and 2008, there's no federal estate tax if your estate is worth $2 million or less.

For the vast majority of Americans, that ends the discussion.

Even if your income is modest, however, you may not be off the hook. Do you live in a community where real-estate values have risen sharply and you've owned the property for a very long time? Have you built up a stake in a company whose stock has shot sky-high over the years, like, say, Google? If so, you may need to do some tax planning. 

The $2 million "exclusion amount" increases until 2010, when it becomes unlimited for a year. That means no federal estate tax, regardless of how big an estate you leave.    But we're talking about the IRS here, so nothing is simple. Die on Dec. 31, 2010, and you pay zero estate tax. Die the next day and the exclusion amount is scheduled to drop down to $1 million. That's why it's so important to sit down with a professional if you think your estate might be big enough for the tax to hit.

Congress has been talking about amending the estate tax rules for two years now, with no progress. Nothing will be done until after the 2008 elections. I suspect at that time we'll get an exclusion of about $3.5 million per person, which, with a properly drafted will, will exclude estates of $7 million or less for married couples.

In the meantime, be careful! Simple things can empty your pockets. For example, if you leave 100% of your assets to your spouse, your estate pays zero tax because of the marital deduction. But, you're losing the value of your exclusion and potentially subjecting an additional $2 million-plus to taxes when your spouse dies. Your children will not be happy!

If you're going to be a potential victim of this "death tax," start planning now. People don't plan to fail, they fail to plan. The earlier you start planning, the more opportunities you have to minimize or potentially eliminate this tax hit.

See an attorney or financial planner who specializes in estate planning. Don't try this yourself. You don't do your own surgery do you? Have your will appropriately written and updated. Consider whether a Family Limited Partnership, a Charitable Remainder Trust, or a Grantor Retained Income Trust would be appropriate. If your assets are going to be subject to the estate tax, make sure your insurance is owned and payable to an Irrevocable Life Insurance Trust to remove those dollars from a tax hit. If your wealth is primarily in non-liquid assets (real estate), consider additional life insurance to provide the liquid dollars to pay the tax when due so those assets don't have to be sold within nine months of your death.

We have literally saved clients millions of dollars by employing the above strategies and techniques. Who do you want to get your money, the IRS or your kids? And, money spent for estate planning to reduce the tax hit is currently deductible on your income tax return.

Plain Language Matters Even In Estate Planning

Plain language? Is that even possible? And with drafting wills and trusts? Read on...

One thing that good lawyers try to do is use plain language in their writings that can be understood by the opposing party, the court and the client in any situation. That said, it is harder to incorporate plain language in estate planning, trusts and probate matters. This is because some terms and phrases in this area, while foreign to clients, have accepted meanings in this practice and have become terms of art.

One word that is often misunderstood, but comes to mind as a great example is the term "issue." Used in a will or trust when one writes and "...to his or her issue..." In this context it means the person's children, grandchildren and maybe even great-grandchildren. It is a nice open ended phrase that can be determined when the person dies as to the extent of their issue for estate planning purposes. Another confusing term is "real property." Real property means real estate or land and is different from personal property.  Review your existing estate planning documents to find other terms of art you find confusing. Ask your estate planning attorney what they mean.

It is preferred to keep the terms of art in the estate planning documents because the interpreters (the lawyers and the judges) know what these terms mean. But other documents involving your attorney should be easy to read and understand -- the fee agreement, letters,  instructions to you about your estate plan and arguments made to the court. Thus, even with utilizing terms of art, plain language is essential in any good lawyer's work.

Enter Cheryl Stephens of Building Rapport and the author of the plain language blog. She is a leader in the field of plain language communication and provides training and workshops to clients all over North America. She is making a guest appearance today in this blog post. She has a new book out, Plain Language Legal Writing, which is fun to read for lawyers and non-lawyers alike.

I had a few questions for Cheryl and here are her responses:

Question: Your work is in the area of plain language. Can you tell us about that? What’s plain language all about?

Answer: Plain language is writing, or any language, that is clear and understandable, so that it’s easy for people to get — and use — information that is important to a person's life.
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Question: What kind of information?

Answer: Well, think of anyplace you’ve seen legalese in your own life: contracts, regulations, waiver forms and releases, even the agreement you have to sign whenever you install software or sign up for something online.
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Question: And you’re saying those things don’t have to be written in legalese? Isn’t the law inherently complex?

Answer: There is no reason that legal language — language regulating legal rights and duties — has to be incomprehensible. It can be made plain enough for its intended audience.

Plain legal language is being written every day. Those who defend out-dated, poorly-written gibberish on the grounds of its complexity should be embarrassed.
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Question: You’re having a contest, aren’t you? What’s that all about?

Answer: It’s a contest to rewrite a section of the U.S. Copyright Act — both to rewrite it as the law would look in plain English, and to write a clear explanation for the general public.
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Question: What are you trying to accomplish with this contest?

Answer: I want to show the difference between legal drafting and legal writing. One task is to redraft the legislation in plain language, and that’s a specialized skill. Not every lawyer needs to know how to do that. But the other task, to explain the law in plain language — that’s a skill every lawyer does need.
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Question: And that’s what your new book is about?

Answer: Yes. I wanted to write a simple but complete guide for lawyers who want to make their writing clearer.
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Question: Well, I think you’ve done a great job. Can you tell us where we can learn more about the book, and about the contest?

Answer: Yes, there’s a web page for the book. PlainLanguageLegalWriting.com, and there’s a link to the contest on that page as well.

Is Your Money Safe?

We have had lots of questions from clients in the last few days regarding the status on the federal takeover and failure of IndyMac Bank. 

Our strong advice is to be sure to break up your accounts into increments of $90,000 and deposit in different banks.   We always advise executors to open up multiple accounts to make sure the monies are FDIC insured.

Here are some answers to common questions you may  have:

Q: How can I make sure my money is safe?

A: All deposits accounts worth $100,000 and less are automatically insured by the FDIC. Many retirement accounts, such as IRAs and 401(k)s, are insured to $250,000 per person. But since it's a person's aggregate deposits, and their not individual accounts, that are insured, any amounts over $100,000 deposited at any one bank are not covered.

While keeping more than the limit at any bank means taking a chance, the risks can be bigger with smaller companies, provided they're heavily exposed to mortgage and other debt during the current downturn.

Q: How much money does the FDIC have?

A: The FDIC has nearly $53 billion in insurance funds. Beyond that figure, Bovenzi said the FDIC would have go to other banks to raise more money, adding that in such a case, consumers could expect to see some of among passed on to them in the form of higher fees.

The current estimated loss to the FDIC resulting from IndyMac's failure is between $4 billion and $8 billion.

Q: How big does FDIC like to keep its deposit insurance fund?

A: The FDIC board of directors has set a Designated Reserve Ratio of 1.25 percent. That means their "target" balance for the fund is 1.25 percent of estimated insured deposits. As of March 31, the fund was $52.843 billion and insured deposits were $4.431 trillion, which resulted in a reserve ratio of 1.19 percent, 0.06 percentage point below the Board's target. If the fund falls below 1.15 percent of estimated insured deposits, the FDIC is required by law to adopt a restoration plan that will bring the reserve ratio back to 1.15 percent within five years.

Q: Do banks have to pay into the deposit insurance fund?

A: Yes. The total amount depends upon the assessment rate assigned to the institution and the size of their assessment base — which is roughly equal to an institution's total domestic deposits. Assessment rates are assigned to institutions based upon the risk they pose to the fund, and currently range from 0.05 percent to 0.43 percent, with the vast majority if institutions — almost 94 percent — paying between 0.05 percent and 0.07 percent.

Don't Leave A Mess for your Loved Ones

Upon your death, your loved ones will be grieving your loss.  Don't make the process more difficult by failing to properly plan for your death.  Here are some things to avoid in order to ensure your final wishes are met and make the process smoother for your loved ones:

1.      Staying ignorant about the process

As with most things, but especially with estate planning, when you don't know what you're doing, mistakes practically make themselves.

If you don't want to leave a mess for your family, you need to bone up on the subject.   But don't think that scanning a book or two will enable you to do it all yourself. Keep in mind that an estate plan is basically a way to distribute your money after you die, minimizing taxes and fees. Hiring a good estate-planning attorney to do this is highly recommended -- and not that expensive.

2. Being clueless about the role of wills

Many people think a will acts as a free pass around probate court -- a common misconception.

A will is simply a letter of instruction appointing someone to be in charge of your estate and specifying how you want your estate to be distributed or divided, but it doesn't avoid probate. 

Instead of simply writing up a will, we recommend putting assets into a living trust -- especially if you own real estate or have over $100,000 in savings.

3. Putting your kid's name on the deed

Adding your kid's name to the title of your house is not a good way to pass the old homestead on to the next generation. Tax implications make it a clunky way to bequeath assets.

Several problems can emerge when someone puts another's name on a house.  First, it's a gift, and the most you can gift to somebody (without notifying the Internal Revenue Service) is $12,000 a year.  So, if the house is worth $200,000, and they put your name on it as a joint tenant with right of survivorship, they just gave you a $100,000 gift for which they have to do a gift-tax report, which then becomes a matter of public record.

This also means you lose tremendous tax benefits that you would have received had you inherited the house.  When you inherit property, you get a step up in cost basis on it.  So if you inherit a house and the value of it is worth $500,000 on the day you inherit it, and you then turn around and sell it for that, you don't pay any tax because that's your new cost basis.

Worst of all, you lose control and ownership interest of your own property.   Your own child can kick you out of your home once they have an ownership interest.  Don’t think it can’t happen.  Money changes people.   Further, if your child has a judgment against him or her, that judgment or lien can be recorded on your property if your child has an ownership interest in it.

In sum, gifting your real property to your children during your lifetime is a big mistake.

4. Dawdling indefinitely

Procrastination may be forgivable for young singles with no dependents, but if you never get around to doing anything, the grief experienced by your survivors will be compounded.

Inaction all but guarantees that tensions will run high after you die.   Anyone with a significant amount of assets, who has children or a spouse should make up a will probably at least by heir 30s or 40s.  You are never too young.  Estate planning is not only for the elderly.

5. Not trusting trusts

Going through probate, a necessity if you die intestate (without a will), will result in your estate paying too many fees. Though often discussed, federal estate taxes won't even touch most estates, but court costs definitely will if not planned for. Why fritter away as much as 10% of your assets built throughout a lifetime of hard work?

A huge benefit of having a trust is to avoid probate, because that allows your estate to pass to your loved ones without having to to the court.  It just goes directly to your heirs and minimizes many of the expenses to your estate. 

6. Leaving messy financial records

Pawing through someone else's disorganized records isn't anyone's idea of a good time. Add in grief and the stress of trying to unearth a will or some other evidence of planning, and it's downright chaos.

Keeping track of all of your information and organizing it in a recognizable way is vital.  Social Security numbers, insurance policies, the name of the companies you do business with, your brokerage accounts and where they're held, and account numbers should all be included.

7. Giving your ex-spouse a parting gift

Failing to occasionally update an estate plan or make changes to beneficiaries after divorce, marriage or other life changes spells trouble.

Major changes such as having children or buying and selling property warrant changes in your will or trust. Equally important are making changes to beneficiary designations on retirement accounts and insurance policies, as those forms trump a will.

Dying without a will or a without naming a guardian often leaves a big mess for loved ones.

8.  Plan for your own Incapacity as well

Besides easing the transition after death, leaving specific instructions about your medical care while alive -- specifically, in the form of a medical directive -- also comes in handy.

We definitely recommend a health-care power of attorney if you are temporarily disabled, a financial power of attorney for someone to pay the electric bill and the gardener and the mortgage if you are disabled.  There's also a very important document known as a healthcare directive which appoints someone to make medical decisions for you in the event of incapacity and puts your final wishes regarding life support into writing.   

If you avoid the above mistakes, you will ensure a smoother transition of your property to your loved ones and minimize the tension, expenses and acrimony that results from failure to plan.