Whither Goeth The Estate Tax?

Estate Tax -Yes or No?. One of the biggest frustrations of estate planners the past few years has been planning for potential estate taxes. The exemption, of course, has been rising, now $2 million and increasing to $3.5 million in 2009. However, the sunset provisions of the large exemptions and the regression to $1 million in 2011 have been a cause of concern.

We advised clients that despite the impasse in Congress, there was movement to increase the exemption and establish a permanent rate in the August 2006 legislation. This was dropped at the last minute because of lack of agreement on the tax rate.

Now we have an election year, a recession, rising deficits, and a costly war. We have been advising clients that the likely compromise will be a personal exemption $3.5 to $5 million per person with some compromise rate of 35 percent (45 percent is the current rate).

Latest Senate Budget Resolution. Conrad Teitell, a leading tax authority on philanthropy and charitable planning, has just released his summary of the latest Senate Budget Resolution. Amendment 4160 was the only estate tax amendment to pass. It would make the 2009 law permanent - a $3.5 million exemption ($7 million per couple) with a 45 percent flat rate. This amendment passed 99 to 1!

Amendment 4160 and the Budget Resolution do not constitute law, but are only the Senate’s intentions regarding the budget.

Mr. Teitell points out that five other amendments were offered but not passed:

Amendment 4170 (exemption per couple $15 million, 35 percent rate) rejected 47 to 52.

Amendment 4191 (exemption $10 million per couple, rate starts at 15 percent, top rate 35 percent) rejected 50 to 50.

Amendment 4372 (special protection for small businesses, ranches, and farms with a $5 million exemption, a lower rate for smaller estates, and a maximum rate of 35 percent) rejected 48 to 50.

Amendment 4196 (exemption $10 million per couple, $5 million per person, rate 35 percent) rejected 38 to 72.

Amendment 4378 (exemption $10 million per couple, $5 million per person, 35 percent flat rate with a small surcharge for large estates, special breaks for small businesses, farms, and ranches) rejected 23 to 77.

Senate Finance Committee. We understand that a third hearing on estate tax revision is scheduled by the Senate Finance Committee in April. At its March 12, 2008 hearing the Committee heard testimony about possible substitutes for the current estate tax system. We have no advance indication of the agenda of an April meeting. However, considering the current gridlock in Congress and the election controversies, it seems to this writer that a compromise on the estate tax is the easy way out, if Congress is going to resolve the mess at all before the election.

Stay Tuned. The winds of Washington blow in strange directions. It is hazardous to predict an outcome in our current environment. However, it is somewhat comforting from a planner’s perspective to have near unanimous Senate approval of an amendment which would basically freeze the 2009 tax provisions.

My guess is that wholesale estate tax reform will probably go the way of wholesale reform of the income tax (a lot of talk and no action). However, who’s to tell. Political prognostication is not my forte. Let’s just hope we get some Congressional action before November.

If you wish to consider estate tax planning or any other matters concerning wills, trusts, or probate, please call Jim Modrall or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660

©BRANDT, FISHER, ALWARD & ROY, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional
advice.

Too Good To Be True

Introduction. This newsletter is slightly off topic. I give credit to one of the authors of my email estate planning newsletter for bringing the subject to my attention.

Zero Tax. It is hard to believe, but there were provisions in the 2003 and 2005 tax laws to provide for zero tax on net capital gains and qualified dividend income in the years 2008, 2009 and 2010. Who gets this tax plum?

Taxpayers who fall into either the 10% or 15% federal income tax bracket (without the addition of capital gains or qualified dividends) are likely candidates for zero federal tax gains.

Keep on Reading. At first blush you may not think you would fit into this category, but read on. There may be ways to take advantage of zero tax.

1) The first thought of transferring appreciated securities to kids who would be in a low tax bracket has been blocked by broadening the "kiddie tax" extending the age of a child/recipient to age 19 or age 24, for a student still dependent on parents.

2) However, you may have an adult child (out of college) who falls into the 10 or 15% bracket. You can gift appreciated securities to that child, who can then sell them with zero tax.

3) If you help support a parent or other family member, using appreciated securities, you may be able to take advantage of the zero tax rules for 2008.

4) US service members deployed to combat zones would be good candidates either to sell securities or receive gifts of appreciated securities which can be sold.

5) Explore other ways to reduce your taxable income, if you want to take advantage of this benefit.

Techniques to Reduce Taxable Income. If you are interested in exploring the possibilities of reducing your tax bracket to take advantage of the zero tax, you should go over the various alternatives with your income tax advisor or financial planner to see if there is a way to qualify for this zero tax benefit. Some methods used by clients to reduce taxable income (and especially to reduce income taxes on social security) could include some of the following techniques:

1) Use investment vehicles such as variable annuities by which income tax can be deferred.

2) Use segregated principal for living expenses.

3) Reduce withdrawals from retirement plans.

4) Maximize tax deductible contributions to retirement plans (not an itemized deduction, but a subtraction from gross income), utilize tax loss carry backs or carry forwards to reduce your tax bracket.

Negatives. There are down sides to be considered in income tax planning, of course. These include:

1) Capital gains income might trigger taxation of a non-taxed social security benefit.

2) A parent might be faced with disposing of the gifted funds in qualifying for Medicaid.

3) A student might find extra money jeopardizing eligibility for financial aid.

Conclusion. The subject of this month’s newsletter does not pertain directly to estate planning and thus is a little bit out of my area. However, I thought you might find this to be an interesting subject and possible cause to sit down with your financial planner or income tax advisor to see if any of the possible applications of zero tax can benefit you or members of your family. One bright spot in this whole process is that transaction costs for stock sales can be very cheap. Moreover, the wash sale rule does not apply so that the same security that is sold to recognize gain can be immediately repurchased at a higher cost basis.

Maybe this newsletter will trigger a flash of inspiration, with some ideas that might be applicable to the situation of you, a member of your family, or a friend.

In the meantime, if you have estate planning needs or have friends or family members who require consultation for estate planning or Medicaid eligibility, please don’t hesitate to contact Jim Modrall or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660

©BRANDT, FISHER, ALWARD & ROY, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional
advice.

The Death Monster

Identity Theft. This is a common worry for all of us, based on the tremendous publicity about protecting social security numbers and bank accounts. Perhaps you have had personal experiences of unauthorized exploitations of your own identity and assets.

A recent email caught my attention because it dealt with identity theft of a deceased person.

What is Involved? If there is a scam involving use of a credit card or social security number of a deceased person, the decedent is obviously not in a position to care. However, the decedent=s estate, trust or spouse could be involved in an unpleasant mess. As you are no doubt aware, the time and sometimes expense of sorting out an unauthorized credit card purchase or bank account withdrawal can be aggravating. If professional help from an accountant or attorney is used, that will mean an out of pocket expense.

A joint credit card account is an especially dangerous target because a surviving spouse may have to fight off the collection efforts for unauthorized expenditures. In our practice we see the effect that such collection efforts have on a surviving spouse who is the typical target on a creditor collection, whether the spouse is a joint signer or not.

Other Scams. It is always possible that a thief may seek to use an identity and social security number for immigration purposes, as a cover for other illegal activities or simply as an alias.

Some Suggested Steps. Typically in our area, a funeral home will notify Social Security immediately in the event of a death. It is important to verify that this has been done. Similarly, we would recommend notifying the credit reporting agencies of the death, so that the credit files are immediately brought up to date. For the record, the agencies and phone numbers are:

Equifax - 888-766-0008

Transunion - 800-680-7289

Experian - 888-397-3742

Many people caution about being too detailed in the decedent=s obituary such as giving exact dates and places of birth. Certainly, given a decedent=s age and birth location, anyone choosing to probe deeply, particularly via the internet, would be able to locate a birth certificate. Again, I would think that notification of the Social Security Administration and the credit reporting agencies would be the principal deterrent to exploitation of a decedent=s identify.

Other Experiences. I recently received two absolutely authentic-looking emails from a bank where I maintain an account. These communications, with the appropriate bank logo, stated there were irregularities in the account and that the account could be Asuspended@ unless I contacted them. Fortunately, the response link was blocked and I never made communication with the sender. When I contacted the bank=s customer service office, I found out that the emails were forged and were an attempt by someone to get by account information. This information could then be used to make charges against the account by telephone. Needless to say, I was upset at both receiving the emails and at learning that they were fraudulent.

Several years ago, I had two unauthorized telephone withdrawals from accounts at a different bank. After the second one, I closed the account on recommendation of the bank. (Which stood the loss in each case.) My experiences involved very minor amounts of money. Friends have told me of unauthorized charges on their credit cards of $5,000-$20,000 in two different instances. Sometimes the banks pick up these charges, but sometimes they slip through bank security and it is up to the cardholder to find them in their monthly statements.

Moral of the Story. Be sure to be wary of emails asking for personal or financial information. Make sure that you and your family are vigilant about clearing the credit history of any deceased member of your family to avoid aggravation, time and expense. Check your credit card bills carefully to discover any unauthorized activity.

If we can be of any assistance in estate planning or probate for you, family members, friends or relatives, please contact Jim Modrall or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660

©BRANDT, FISHER, ALWARD & ROY, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional
advice.

Estate Taxes and Life Insurance

This newsletter is a summary of the September edition of my estate planning email newsletter which contained statistics relating to both life insurance and estate tax returns.

Estate Tax Returns. As you would probably suspect from the fact that the individual estate tax exemption has risen to $2.0 million per person, the number of estate tax returns filed fell from about 108,000 in 2001 to 45,000 in 2005. That number is undoubtedly lower for 2006 because the exemption is now increased to $2.0 million per person.

Estate tax revenue, however, dropped by a much smaller percentage, from $23.5 billion in 2001 to $21.6 billion in 2005. Again, as you would suspect, an increasingly high percentage of the estate taxes paid came from larger estates.

The report notes that revenue for federal estate and gift taxes has ranged from 1% to 2% of federal budget receipts since World War II. Since Congress has adopted the pay-go policy (assigned revenue sources to replace tax reductions), what do you think of the chances that the estate tax will be repealed?

Life Insurance. The subject of life insurance is a confusing and touchy one. The Life Insurance Marketing Association (LIMRA) has some interesting statistics on the subject.

We deal with life insurance in an estate and Medicaid planning context. We sometimes review life insurance coverage from the standpoint of estate liquidity (for taxes and debts) and not so much from the standpoint of income replacement.

Income replacement is a common reason for younger persons to buy life insurance (in addition to the group insurance from their employment). LIMRA reported that 75% of married couples with children under 18 buy life insurance to replace lost income.

LIMRA also says that 43% of parents want life insurance to pay off the mortgage on their home.

In our experience, there are three principal deterrents to the purchase of life insurance:

1) Cost. Even though term insurance rates have been falling, many parents are concerned with the cost of life insurance protection.

2) Lack of Knowledge. LIMRA states that 50% of persons surveyed don’t know how much insurance to buy.

3) Confusion. Parents find the subject of life insurance very confusing, probably because of the different products available.

Advice for Young Parents. Many readers of this newsletter would not be classified as young parents. However, many readers have children or grandchildren in this category. You can provide a valuable service to these loved ones by discussing the matter of life insurance protection and sharing your knowledge about it.

Young persons typically have term insurance. The cost is low in relation to the amount of the death benefit. This is especially important for parents before their children finish college. The expenses of education, mortgage payments and income replacement can be staggering at that phase of life. Typically, for most people with average health, the cost of term insurance is not prohibitive. The consequences of inadequate insurance for parents in this stage of life can be devastating.

Tax Advantages. The tax advantages of life insurance are designed for more sophisticated, higher net worth individuals. Life insurance is tax advantaged because the build up in the contract is not subject to income taxes. That build up, sometimes called cash surrender value (CSV) can be a valuable source of liquidity in later years. Individuals or couples in high tax brackets, but still under the age of 60, can use the tax saver provisions of life insurance for asset build up, especially if the contract and death benefits are protected with an Irrevocable Life Insurance Trust (ILIT).

Conclusion. As all of you know, we do not sell life insurance. However, we see examples of good estate planning using life insurance everyday. Properly designed ILITs provide tax efficient vehicles for transfers of wealth from one generation to the next. Life insurance contracts, in their various iterations, permit accumulation of income, dividends and capital appreciation without income tax or estate tax.

We suspect that one of the reasons that more people do not use this device is the problem of confusion about life insurance products and all of the variations thereof. Another problem is the discipline of paying annual premiums by contributions to the Trust and the attention to the detail of the Crummey notices each year. However, most investment advisors recommend the "slow and steady" approach to wealth accumulation and this also applies to wealth transfer.

We suggest that you consult younger family members about the benefits of life insurance for income protection and that you and your colleagues who have concerns about wealth transfer and/or estate taxes seriously consider ILIT’s to accomplish significant wealth transfers in one of the most tax efficient ways possible.

If we can be of any assistance in consultations regarding ILITs, please contact Jim Modrall III or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H. Douglas Shepherd, Karin Church and Laura E. Garneau at (231) 941-9660

©BRANDT, FISHER, ALWARD & ROY, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional
advice.