December 31, 2009
As you may (or may not) have heard in the popular press, your favorite news site, or from reading this post at South Florida Estate Planning Law written by my colleague David Shulman, the estate tax is officially repealed as of 12:00am January 1, 2010. Seeing as Congress has mere hours to pass legislation to change that, I see the repeal being a pretty sure thing.
So what does that mean? As it currently stands (for the remaining hours of 2009), an individual has a $3.5 million estate tax exemption (a couple can increase that to $7 million with proper planning). The estate tax is set to disappear for 2010, as stated above. Some are calling it the “throw mama’ from the train” year . . . as in, die in 2010 so that your estate is not subject to estate tax. That’s all well and good, and I’m sure it will benefit many folks who pass away in 2010. However, as Paul Harvey used to say, “now . . . the rest of the story.”
Accompanying the repeal of the estate tax is a change to the “basis” treatment for estate assets. Basis is (typically) what you paid for an asset. As you likely know, when you sell an asset, you pay tax on the “gain” – the amount you sold it for minus what you paid for it (basis) – sometimes more commonly referred to as “profit.” In 2009 (and many years before), you get a “step up” in basis on the assets of someone who passes away. This means that the beneficiaries who receive your assets have a basis in those assets equal to the assets’ value on the date of death. They get to use that basis if/when they later sell the assets. Here’s an example:
Date of death: 12/31/2009
Total asset value: $3 million
Dying person’s basis: $1 million
Estate tax: $0 (under the $3.5 million exemption amount)
Asset basis for beneficiaries: $3 million (“stepped-up” to value on date of death)
If the beneficiaries later sell the assets for $3.5 million, they will pay tax on only $500,000 – the amount the assets sold for minus their basis.
With the 2010 estate tax repeal comes a change to those basis rules. For 2010, the stepped-up basis is limited to $3.0 million in assets passing to a spouse and (more importantly, I think) a $1.3 million aggregate amount (so, in effect, up to $4.3 million for a spouse, but only $1.3 million for non-spouse). So, the estate doesn’t pay any federal estate tax, but what does it mean for the non-spouse beneficiaries? Let’s use the same example as above:
Date of death: 1/1/2010 (what a difference a day makes!)
Total asset value: $3 million
Dying person’s basis: $1 million
Estate tax: $0 (estate tax repealed)
Asset basis for beneficiaries: $2.3 million ($1 million basis of the person who died + $1.3 million “step up”)
If the beneficiaries later sell the assets for $3.5 million, they will pay tax on $1.2 million – the amount the assets sold for minus their basis (which had only the limited step up).
As you can probably imagine, the amount of tax on the additional $700,000 is a fairly significant number, especially when you consider that it is very unlikely that taxes will go down anytime soon (sorry for getting a little bit political). On top of that, there is a looming paperwork nightmare. Can you imagine? How are you going to prove what the dying person’s basis was, especially for some of the more uncommon assets? Valuation will become a larger headache than it already is. Sure it can be done, but what an incredible hassle. As a matter of fact, a friend of mine is a supervising attorney in the estate and gift tax department of the IRS and she said that the IRS is sorely prepared to deal with such a paperwork avalanche. For sure there will be a lot of additional searching, researching, and organizing that will need to be done. It will be interesting to see how much additional cost will be associated with this, in professional fees (lawyers, CPAs, financial advisors, etc.) and otherwise.
Oh, and one more thing. Did you catch the missing word? Gift tax. Nope, gift tax is not going away. It stays in full effect throughout 2010. Apparently, Congress was concerned that if the gift tax went away, wealthy taxpayers would make large gifts to family members in lower income tax brackets (a valid concern). So, the gift tax exemption remains at $1 million.
And wait . . . there’s more! The law that put the estate tax repeal into effect (the Economic Growth and Tax Relief Reconciliation Act of 2001) is set to “sunset” in 2011, returning the estate tax and gift tax to what they were before the law was in effect. Curious to know what that was? I knew you would be. The estate tax exemption was (and will go back to) $1 million. That’s right . . . $1 million! And the tax rate will be 55%! Sure, that’s a significant amount of money and you may be thinking “no big deal, it’s a million bucks,” but consider the example above. If all goes as scheduled, if our example person died in 2011, the estate tax on the estate would be $1.1 MILLION (55% of $2 million)! The beneficiaries will miss out on $1.1 million of additional inheritance. Now THAT is a significant number. Keep in mind that this can be “fixed” with proper planning.
So there you have it. That is what is supposed to happen as things stand on the books right now. Will it actually happen? Well the repeal will definitely occur if Congress doesn’t act today. The question is, for how long. Consensus seems to be that Congress will address the issue next year. What will they do? I’m not sure and I don’t think anyone knows for sure. The most common idea I’ve heard is that they will retroactively extend the current $3.5 million exemption and 45% tax rate. We’ll see. 2010 will be a very interesting year for us estate planners, that’s for sure!
One thing I am fairly sure of (cue the Arnold voice) . . . It will be bbbaaaacckk!
Happy New Year everyone!
December 24, 2009
As I sit here in the office in beautiful downtown Grand Rapids on Christmas eve listening to Bing Crosby sing “White Christmas,” I wanted to take the opportunity to wish everyone a Merry Christmas. Whether you are a business client, estate planning client, a trusted referral source, mentor, trusted advisor, friend, or family, I wish you and your family the most joyous Christmas. I especially want to thank all our servicemen and servicewomen around the globe who, because of their sacrifice for our freedom, will not be with their family this Christmas. Thank you!
Christmas is a time of year that is almost “magical.” As we (hopefully) turn our minds toward the true reason for the season (our Savior’s birth!), all the worries and frustrations of life and the economy seem to melt away, much like the candy we will no doubt be consuming. We take this time to spend with family and friends, to revel in the spirit of giving and appreciation. And for businesses, it is an opportunity to show your employees and customers that you truly care. Hopefully you’ve already sent your Christmas cards out and have let your employees, vendors, and business associates know how much you appreciate them, through gift, time off, or just a hearty “Merry Christmas!”
As you spend time with your family this Christmas, think of all the lasting memories you will make. The funny faces when opening a gift you don’t quite know what to do with (we’ve all been there), the child tossing aside the toy and playing with the box and wrapping paper instead, and the pure joy of family. And consider making it a top priority in 2010 to make sure those memories are preserved and that provision is made for many more. Sure enough, I’m talking about estate planning. And make sure that your estate planning attorney passes along your “whole family wealth,” those intangibles that are lost when you pass away – the Christmas memories, your values, insights, stories, and experiences. And seriously consider using a living trust to make sure that your financial assets will be around as long as your family will, to provide for a lifetime of cherished memories.
And if you have ever thought of starting a business . . . what are you waiting for?! The general consensus is that we are starting to work our way out of the nasty recession. Much like the investing adage of “buy low, sell high,” you want to start your business before or (at the latest) as the economy is starting to pick up steam again. Whether the growth will be slow and gradual or fast and immediate doesn’t matter – the fact is, you want to take advantage of the increased demand while competition is still low.
And if you have a business, congratulations for making it through one of the worst recessions on record. You did it! I encourage you to take some time over the next week or two and spend it on developing your plan to increase your business and market share as the economy begins to pick up steam. What an opportunity you have – decreased competition and a growing economy . . . the perfect recipe for your growth and success!
As I plan to leave a little bit early myself today, I will leave you with those thoughts. And MERRY CHRISTMAS to you all!
December 15, 2009
Have you or your wife/husband ever said that? I know I have. As a matter of fact, I found myself saying it several times recently as I worked to clean up the disaster area that is my workspace at home. I was trying to find some tax information and found myself sifting through brokerage statements, insurance statements, automobile repair receipts (yes, I keep those), my (living will, trust, power of attorney) estate planning documents, and many other documents that are vital to our family (ok, maybe the auto receipts are not). All of these documents were lumped together in a pile, which made the task tedious and very frustrating. So, I began putting them in their own folders and filing them in the safe. After a decent amount of time passed, I gave up on that as well, realizing that it was taking away from what little time I had to spend with my family.
A couple of days later I was thinking about how 2010 is almost upon us and how a new year gives us a blank slate and a fresh start, in many respects. Many people develop “New Year’s Resolutions” to lose weight, become a better person, give more to charity, spend more time with their family, and many other admirable goals. What about getting our financial and legal life in order? What would that entail? Knowing that many families have the same mess of legal and financial documents that caused my recent frustration, I thought it would be a good opportunity to help others (and myself) start the year of right by getting their legal and financial life in order.
To help Grand Rapids families in this endeavor, I am “super sizing” my Family Wealth Planning Session and adding in a Whole Family Wealth Audit. And the best part for you is that I am waiving the usual fee for this session for those families who schedule their Whole Family Wealth Audit and Family Wealth Planning Session in January (a $1,250 value!). Why am I doing this? My recent experience with document frustration and my passion for helping growing families provide and protect what matters most to them (family and finances) and ensure they make the best legal and financial decisions throughout their lives. Although you could do this anytime throughout the year, there is something refreshing about getting it done at the beginning, so you can benefit from it for the rest of the year (and the years to come). And the best part is that all you have to do is bring the documentation with you. I will organize the Family Financial Freedom Notebook as we talk about the importance of the various items. It doesn’t get much easier than that!
In the planning session I will go above and beyond my usual education about what would occur if something happened to you, how to name guardians and protect/provide for your children, how to preserve, protect, and grow your financial assets, and how to pass on your intangible assets (values, insights, stories, and experiences). You will also walk away with a Family Financial Freedom Notebook designed to organize all your family’s important legal and financial documents. If you already have legal documents, insurance policies, financial plans and/or tax strategies in place, we’ll review all of it to make sure everything is set up the right way. And if you don’t, we’ll make sure you leave with a roadmap for everything you and your family need for total peace of mind. I have already discovered the value of getting this level of organization put in place as I’ve created my own Family Financial Freedom Notebook, and I look forward to helping you with yours as well.
If you agree that this would be a great way to start off your new year and ensure your family has planned and prepared for the years to come, call our office to schedule your January planning session at (616) 827-7596. Make sure to mention this blog post to get the planning session fee completely waived (NO COST!). Due to demand and limited availability, we are offering this on a first-come, first-served basis, and we are limiting them to the first 10 people who call. I look forward to helping your family in what I’m sure will prove to be a great 2010!
December 3, 2009
I just read a good article discussing the need for estate planning even when you are not “Old” or “Rich.” You can find the article here: http://www.knoxnews.com/news/2009/dec/03/dont-wait-till-youre-old-or-rich-estate-plan/ Although I don’t agree with all the statements that are made in the article, such as using online forms, I do think it provides a very informative and “real” point of view on why planning when you’re younger is advantageous. I’ve always said it is easier to plan when you don’t think it matters. It’s when you’re back is up against the wall due to age, health, or other reasons, that planning becomes more difficult, as the decisions seem more “real.” So what do you think? Please share your comments.