This year’s temporary repeal of the Federal Estate Tax has created a new set of problems for those inheriting appreciated assets.  Amy Feldman details these problems in her article “Trouble For Heirs” found in the April 25, 2010 issue of Bloomberg Businessweek.  There is no Federal Estate Tax in 2010, but stepped-up basis of assets is limited to:

1.  $1.3 Million of assets determined at date of death.

2.  An additional $3 million for the surviving spouse.

3.  Basis allocation based on the Executor’s discretion.

In addition, there exists the practical problem of finding all the records to determine the basis especially where dividends have been reinvested or improvements have been made to real property.  How many people have all those records that could go back 50 to 60 years or more.

Maryland heirs’ situation is further complicated by the State’s Estate Tax of up to 16% on amounts exceeding $1 million.  The Maryland Legislature did pass emergency legislation to protect the bypass exemption to the December 31, 2009 amount of $3.5 million.  The legislation solves one of the problems that Amy Feldman mentions in her companion article “Wills That Won’t”.  However, for most families putting up to $3.5 million in a bypass trust leaves nothing to pass outright to the surviving spouse creating even more unintended consequences.

Families with wills or trusts that contain bypass provisions should schedule an appointment with their attorney to review their documents.  Changes may be needed to comply with the 2010 Estate Tax Laws.  Most Estate Tax Lawyers predicted that Congress would act to extend the Federal Estate Tax at least by early 2010.  It is now May 2010 and time for astute families to act to ensure their legacy is protected.

2009 Wealth Counsel Symposium in Chicago

I just returned from a four day symposium on issues of concern to Estate Planning attorneys. The question of what will happen with the estate tax in 2010 seems to be overshadowed by healthcare issues. However, everyone is in agreement that Congress will not let the Estate Tax lapse in 2010. A big concern right now is Medicaid Planning as the recession has left many seniors without the assets to pay for long term care. Additionally, medical improvements have lengthened the time that seniors require assistance with their daily activities. The consensus is that our society needs to do more to help seniors continue to live in their own homes.

Ed Slott, PBS host of “Stay Rich Forever and Ever”, presented the strong argument for converting your IRA to a Roth IRA in 2010. Right now, Uncle Sam is a minority partner in your IRA and you have a chance to buy him out in 2010. Otherwise, tax increases will increase the government’s share of your retirement assets especially as we come out of the recession.

William Colby, a nationally known expert on end of life issues spoke on how medicine advances is effecting end of life decisions. The Baby Boomers are now facing these decisions and expect some changes. Mr. Colby’s point to families is to communicate your wishes and values to your families. You do need to have a planning document in place, but nothing can replace some frank discussion among family members.

Additional seminars on putting down personal values into wills and trusts can make bequests far more meaningful than just the money or personal property. Business owners need to have their buy-sell agreements reviewed and fixed to prevent death, disability, divorce, and a myriad of other factors that can destroy a viable business. Farmers and Ranchers need to have estate plans in place as their land really identifies the family and is more important than just the dollar value of their holdings.

Finally, we were able to take in some of the sights of Chicago. Valerie checked out the stores on Michigan Avenue, we listened to some jazz at the Shedd Acquarium, and we had some Chicago pizza and Vienna beef. I left feeling energized to take care of my clients and protect their legacy in this difficult financial environment.

1. Tax Savings – A trust established by the first spouse to die effectively doubles the estate tax exemption. For 2009 the Federal exemption is $3.5 million and the state exemption is $1 million in Maryland.
2. Keep the money in the family – The first spouse to die leaves the money for the survivor to use according to standards such as health, maintenance, and support. Ultimately, the money passes to their children. The survivor’s new spouse cannot inherit the trust money and does not have any right to the trust.
3. Administration – A trustee provides a check on how the trust assets are spent and provides a means to dispense funds in the event of a disability.
4. The trust can contain provisions to protect the assets from creditors.

Many of you have seen your estate values cut in half or more while the Federal Estate tax minimum has gone from $2 million to $3.5 million. The feeling is that you do not need to do any estate planning. The problem is that you do not know what the law will be at the time when you pass away. Moreover, the law is even more likely to change by the time the second spouse dies.

As an example, we frequently see widows that have outlived their husbands by ten, twenty, or even thirty years. When their husbands passed away the value of his estate was often less than the federal limit at that time of $675,000. The surviving wife ended up with home, investments, and a pension. The pension and social security covered all her living expenses. The home and investments continued to double every seven to nine years depending on the market conditions. The widow continues to hold the investments concerned that she may need the money in the event of a serious illness. More than likely, the state of Maryland will receive 16% of the amount the estate exceeds $1 million dollars or the estate will be devoured by medical expenses.

This scenario could easily repeat itself if assets return to their historic values. Establishing a By-pass trust upon the death of the husband would have protected the couple’s moderately valued estate for their children by effectively doubly the estate tax exemption. Long care health insurance provides protection for the expense of nursing care.