Kansas & Missouri Estate Planning

Estate Taxes - The Only Certainty Is Uncertainty

If you've been following the political saga of the estate tax over the past few years then you know it's coming to a head… again. In fact, the estate tax may very well be amongst the largest and most divisive topics as we sink deeper into the current election cycle.

It's hard to say which way it will fall, or if it will stay there for long, and that just makes estate planning a bit tricky.

Even if it's hard to say what will happen, there still are some fairly likely situations that may occur and with very different consequences. In the military, we called it "situational awareness," but in the civilian world consider it knowing where you are in relation to where the threats are. So, if you are one of the (ever fewer) remaining taxpayers, then here is a recent article laying out the four possibilities.

1. Gridlock. Each party pushes and pulls and yet there is no victor, and so we all lose. That is to say that if the current law isn't extended, updated, or changed, the compromise deal reached in December of 2010 will sunset and the law will revert all the way to pre Bush tax-cuts at a whopping 55% over the $1 million exemption. That's higher than a number of pro-tax advocates care to call for, especially given the inflation of some ten years. That said, Congressman Jim McDermott of Washington has put just such a bill into the works, with those rates and exemption amount indexed for inflation.
2. Stalemate. Perhaps no one will win but no one will want to lose, and receive their self-inflicted pain, either. Instead of failing to pass any measure they can simply extend what we have now. President Obama signed it once already and it's a far better deal than most anti-tax representatives have seen before or since the lapse in 2010.
3. Democrat control. In many ways it's fairly difficult to say what this would amount to since there are more pro-tax representatives amongst Democrats but few that are so concerned as to return to steep taxation. To take President Obama as a cue, it may mean a return to a higher rate (somewhere between the current 35% and 55%) to add a bit more edge, but also a higher exemption amount to cut into fewer estates.
4. Republican control. Especially if there is a Republican in the White House sometime soon, there's renewed possibility of dropping rates and exemptions or even a lapse of the tax entirely. Of course, even with most of the legislative and executive branches there is a growing political furor over the taxation of wealth – even certain potential Republican candidates are voicing these concerns – and the estate tax is an easy target.

In the end, 2012 will be about keeping one eye on the ebb and flow of politics, even if it is a particularly rapid current these days, and intelligently planning. After all, having plans in place won't hurt if the estate tax does pass on into legislative history, but the other way around can bring some pain. For that matter, the estate tax isn't the only impetus for a solid plan for the distribution of wealth.

Bottom line: As long as there is a Congress in session and an occupant in the White House, no man's wallet is safe, whether he or she be living or dead. Just my two cents.

Reference: Producers Web (January 17, 2012) "4 potential scenarios for the future of the estate tax"

Estate (Tax) Planning Perspectives

Don't be lulled into a false sense of security when it comes to estate law. That's the lesson from a recent article out of Investment News... a gentle reminder that the estate law trap may be closing soon.

Tax changes that President Obama and Congress hammered out in the final days of 2010 discouraged clients from seeking estate-planning advice last year, even though estate lawyers argue there are many planning opportunities that shouldn't be missed.

As many taxpayers are well aware, the current laws related to wealth transfers (i.e., the estate tax, the gift tax, and the generation-skipping transfer (GST) tax) were set just over a year ago in the final days of December. Those laws offered fairly generous policies, effective rates, and exemption amounts, generous enough to surprise even the experts and to calm the thousands of families just spared from the estate tax. According to a Trusts & Estates magazine survey of legal and financial advisors, over the past year tax avoidance dropped from the primary concern of many to the fourth place concern.

The gentle reminder, gentle readers: The laws are only good until 2013 and, barring any sudden outburst of non-partisan productivity at Capitol Hill, are set to expire within a year's time.

Snap, the tax trap shuts!

While tax avoidance need not be your primary concern when it comes to planning, it's likely to be a very important factor for purely economic reasons and, since estate planning is about the long haul in the first place, you can’t base it on short-term laws.

Of course, however you rate the importance of tax avoidance when it comes to estate planning; it is rarely the sole concern. This lull in the taxes also can help clarify your goals in other areas.

If tax avoidance dropped from number 1 to number 4, what did people start thinking about? According to the survey, people began planning in earnest to avoid chaos and discord among beneficiaries, to avoid probate, and to protect children from mismanaging their inheritance.

Reference: Investment News (January 15, 2012) "Estate tax lull may trap wealthy"

Capital Gain Conundrums

Schedule D is so Last Year! You were used to reporting capital gains and losses on Schedule D. Now, in most cases, use new Form 8949 to report capital gain and loss transactions.

A new tax season and a new tax reporting rule for capital gains. It's not a big change but, as Robert Wood writing for Forbes reminds us, any change to something as important as the capital gains tax is worth noting, especially with tax season upon us. From the IRS news release:

New Way to Report Capital Gains and Losses

In most cases, taxpayers now use new Form 8949 to report capital gain and loss transactions. Schedule D, the form traditionally used to show these individual transactions, is now used as a summary sheet, reporting amounts for total sales price, basis and other adjustments for all individual transactions, and for figuring the tax. For securities both bought and sold in 2011, the Form 1099-B, issued by the broker, normally shows the taxpayer's basis. The information on this form will help taxpayers correctly fill out Form 8949. See the instructions for Form 8949 and Schedule D for details.

If nothing else, let this practical change remind you of the very practical reality of capital gains and losses, and what they mean to your estate planning strategies. Your goal, after all, is to leave your assets to your loved ones. However, depending on how you manage your planning, you also may be incurring unnecessary gift or estate taxes on your end… and inheritance or capital gains taxes on the recipient's end. Accordingly, bearing this in mind can allow more precise footwork with your overall wealth transfer planning (especially when it comes to the taxable basis of the assets).

Reference: Forbes (January 11, 2012) "New Capital Gains Tax Reporting For 2011 Returns"; IRS.GOV news (January 2012) "2011 Changes Offer Tax Benefits to Almost Everyone; Special Tax Payment and Reporting Requirements Apply to Many"

Estate Planning New Year’s Resolutions

Time has almost expired for 2011. Where did it go? With the new year, you know what that means.

With the exception of a few last minute gifts and end-of-year financial transactions, that usually means relaxing with eggnog and, a bit later, champagne. Of course, it also means that 2012 is about to start ticking and, yes, that's big news.

2012 is going to be a big year for planning. Why? Because the end of 2012 also means the end of the foreseeable future regarding a huge swath of estate planning issues.

Everything we know now about the estate tax, the gift tax, and the other wealth transfer taxes is only set in the tax code until the end of 2012… at least until Congress finishes battling it out and makes a decision about what to do going forward.

In the end, proper planning these days is about taking advantage of what we know about 2012, and hedging our bets about the future thereafter. So what do we know? Smart Money recently provided a brief run-down here:

The estate tax is still set at a $5 million exemption with a 35% rate thereafter but, barring action, it will revert back to a $1 million exemption and a 55% rate! To be precise, the estate tax is actually indexed for inflation and that means it is effectively set at $5.12 million for 2012

The exemption amount for the gift tax is the same as it is for the lifetime gift-tax exemption at the inflation indexed $5.12 million, and in like fashion will snap back in 2013 without any action. This means that it may be the last year ever to take advantage of that unprecedented gifting amount.

Finally, a new and very progressive provision will still be in place for 2012: "portability."

Portability means that a spouse may pass along their unused estate/gift tax exemption to their surviving spouse. That makes the effective total a married couple can pass on without tax a whopping $10 million, or $10.24 once indexed for inflation.

These at least are the basic facts. It may well be that we will see a situation not unlike what occurred in 2010, when the Bush-era laws expired at congressional inaction. Remember that? Taxpayers tried to hold out until 2010 and then tried to hold onto 2010 laws (or lack thereof) until the first moments of 2011.

Will we be holding onto these laws currently in play through 2012 and their generous exemptions, or is 2013 going to be even more advantageous… or treacherous for taxpayers?

Reference: Smart Money (December 13, 2011) "Estate Planning for 2012"

Business Succession Planning Priorities

When someone starts talking about "business planning," too often they just mean getting it off the ground or, if they have high aspirations, how to make it fly once airborne. Of course, "business planning" also is about keeping the business aloft through turbulence (e.g., bad markets) and even should the pilot-in-command become unable to fly (e.g., retirement, incapacity, or death).

In the end, a proper business plan for any small business, but especially for a family business, always entails some form of succession planning.

I just ran across and Forbes article that ran a few months ago, yet is forever timely on this subject. This article illustrates just how important coordinated succession planning and estate planning are in the context of a family-owned business.

If you run such a businesses, whether it's a small shop or a large company, oftentimes your personal wealth and the wealth of the family is tied up with the business itself and your ability to keep running it. [Not to mentioned an lines of credit your signature and personal assets may secure.] What happens when you fall ill or pass away?

"That day" is not always a day you can see coming or you can delay.

The biggest hurdle to any succession plan is planning for your own succssor. Let's face it, running a business is tough and jumping on board while the carousel is moving can be a dicey proposition.

While the Forbes article has some specific advice, undoubtedly it will take measured thought and time to form and implement an effective succession plan. Then again, there also must be the contingency of deciding simply to sell the business. Either way, whether you ultimately continue the business or sell it, careful planning is a must.

In many ways, it's not just for your own sake or for the sake of your family that the business has to be protected with proper planning. A business means employment for many people and often wealth for a community. It's timely news, then, to find that small businesses created 55,000 new jobs this past November.

Oh, if no one has thanked you lately for being a business owner and that means, then let me say "thank you."

Reference: Forbes (October 12, 2011) "Identifying a Successor for Your Family-Owned Business"

Kicking the Can – Washington’s Tax Tangle

The end of the year doesn't just mean turkey, presents, and, perhap, a swig (or two) of champagne. No, it also means end-of-year tax planning. That's never fun, but this year even the Congressional Supercommittee decided to punt.

As a result, we now are into December, without a clear idea of the major tax-code issues we'll face in the coming years. Actually, and quite unfortunately, this is the third consecutive year that December has brought us such confusion, and with it, a different congressional squabble each year.

If you're looking for assistance, there are many voices out there. For instance, check out a recent article in Forbes titled "Yearend Tax Planning In Uncertain Times" and, while you are at it, "The Tax Mess Deepens" in none other than The Wall Street Journal. As always, the steps you should take depends largely on your own financial position. Regardless, there are some key tax-code issues to bear in mind as they fight it out on Capital Hill.

By year's end, Congress must come to a decision about a host of programs. For example, the two percent Social Security payroll tax holiday (one that has meant extra folding money for a great many families), not to mention fixing the Alternative Minimum Tax (AMT) so that millions of taxpayers don't end up ensnared in it for 2012 (many of them solidly middle-class).

To make matters even more "interesting," these program decisions are on the plate for this month, this year. The real fun will be watching the battles to be waged next year (an election year, at that). The tax code has been agreed upon only until the end of next year, meaning that we have no idea what will happen and very little way to guess accurately.

In my world of estate planning, we are keeping a hawk's eye on the future of the estate tax.

Uncertainty is the bane of all tax-planning, whether you are planning for your estate or for your medical budget, but isn't "uncertainty" the reason we plan in the first place?

Ah, isn't it good to live in interesting times?

References: Forbes (November 30, 2011) "Yearend Tax Planning In Uncertain Times"

                  The Wall Street Journal (November 26, 2011) "The Tax Mess Deepens"

Estate Tax In The (Political) Crosshairs

Both Rick Perry and Herman Cain, contenders in the race to be the next Republican candidate for president, are proposing massive overhauls of the current tax regime... and neither is a fan of the estate tax.

We've been glued to the news for the past few years trying to figure out what Congress is going to do next with taxes, to include the estate tax. More uncertainty has been the answer. Currently, we are living under an estate tax approach that is due to die on December 31, 2012. What follows is anybody's guess.

Now though, all eyes are on the upcoming presidential election. Accordingly, it is the new crop of candidates we're watching, and there's quite a fight brewing as November 2012 draws nearer.  

Rick Perry and Herman Cain have come out with massive tax overhaul plans, leaving many to wonder which plan would be cheaper and for whom. Since this blog post is about the estate tax, it's worth noting that the biggest similarity involves doing away with the estate tax.

Indeed, each of the major potential Republican candidates has come out strongly against the estate tax with each, except Jon Hunstman, signing the American Family Business Institute's (AFBI) pledge to repeal the estate tax. [Sidebar: Huntsman just doesn't like signing pledges, even if he also doesn't care for the estate tax.] The two current representatives, Rep. Michele Bachman and Sen. Ron Paul, have even put forward their own separate bills to repeal the estate tax.

Repealing the estate tax is one of the few pillars of agreement in conservative politics today. However, President Obama is not keen on doing away with the estate tax, so we can expect the issue will become a flashpoint during the presidential election.

What's going to happen? How can we plan our estates in the midst of all this certain uncertainty? Even if you have full faith in a Republican victory, regardless of the candidate, their bills still have to make their way through what may remain a divided Congress. Simply put, it's possible that we haven' seen anything yet when it comes to the political squabble that is the estate tax.

Reference: MarketWatch (October 25, 2011) "Perry flat tax vs. Cain 9-9-9: How they’d hit you"

QTIPs: May Cause Problems Unrelated To Your Ears

Caution: Watch out for QTIPs (and not just because your doctor is worried you will hurt your ear).

A QTIP is shorthand for "Qualified Terminable Interest Property." In short, it's a way to hold property for the surviving spouse that qualifies for the unlimited marital deduction without being an outright bequest.

Blended families are a fairly normal part of the modern family landscape, with both divorces and remarriages rather commonplace. Not surprisingly, this fact of life accounts for a goodly portion of the family baggage of modern living and, with it, a lion's share of the estate planning problems. Blended families have some extra concerns and extra problems to be sure, especially when each spouse hopes to take care of their own children from a previous marriage. A recent Forbes article explores a particularly strange probate case illustrative of this point.

Of course, a spouse can always give his or her assets outright to their surviving spouse without incurring taxation. In the case of an outright bequest the surviving spouse gets to deal with the outright assets as his or her own property (because it is). But what if you ultimately wanted to give the property to your children from a previous marriage, but you wanted to allow your spouse to have it until their own death? That's the planning strategy that lead to the contested probate court case of In the Matter of The Estate of Sydney Stark, as described by Forbes.

Sydney Stark used the QTIP to leave an apartment to his wife, Sylvia, and then ultimately to his children from a previous marriage. The problem with the QTIP is that the assets in the QTIP have to count as being owned within the surviving spouse's estate to qualify for the marital deduction. As a result, it becomes more likely that the surviving spouse's estate may incur the estate tax. And, indeed, Sylvia Stark's estate did.

In the case of a blended family like this one, with Sylvia leaving her assets to her own child of a previous marriage, this strategy meant Sylvia left an estate tax bill to her own child without the additional assets in her estate to pay the IRS. Why? The QTIP assets passed fully to the children of Sydney Stark. Naturally, Sylvia's own child cried foul.

You can read more about QTIPs and this unfortunate tale in the original article. In the end, this case provides yet another lesson about matters for careful consideration when planning your estate, especially if you and your spouse have complex and potentially competing interests.

Reference: Forbes (October 14, 2011) "Blended Family Not Like The Brady Bunch – At Least Not in Probate Court"

Valuation Discount Opportunities

When it comes to wealth transfer planning, valuation matters. In fact, contemporaneous appraisals can be worth a lot. Retrospective appraisals — done after the fact and purporting to express value as of a date in the past — are never as persuasive as appraisals done contemporaneously.

Oftentimes, proper planning is about the ability to offer proper proof. That's my primary take-away lesson from the Ninth Circuit Court of Appeals and the case of Estate of Petter v. Commissioner, as assessed in a recent Forbes article.

As many of you appreciate, when giving away assets it is important to get the most bang for your buck and that can be achieved by generating "discounts." Anyway, this was the plan of Ms. Petter when she transferred $22 million of UPS stock to a limited liability company (LLC) and then gave or sold units of the LLC to her heirs. Note: An LLC can help diffuse ownership and effectively transform the taxable value of the underlying assets.

This transformation of value hinges on the "marketability" of the interests held by the LLC members and their degree of "control" over the assets. As a result, the lack of marketability and control makes the interests held by the LLC members less valuable. Accordingly, such interests are "worth less" than the face value of the underlying assets and their value inside the LLC may be "discounted." Such was the case with the LLC established by Ms. Petter.

Ms. Petter claimed a whopping 51% discount on the underlying assets of the LLC. Unfortunately, she was unable to support this discounted value and the IRS rejected that figure and approved a far more conservative discount of 36%.

Not to be defeated, Ms. Petter tried another approach. She built a provision into her planning that, were there a valuation dispute with the IRS, then any discounted percentage denied would automatically go to her chosen charity… instead of to her estate or an heir. Why? She wanted to avoid any gift or estate taxes. Naturally, the IRS challenged this fall back position, but the Ninth Circuit upheld it. Does it get any better than that?

Reference: Forbes (September 30, 2011) "Fancy Appraisals Can Defeat IRS"

“Crummey” Trust Anyone?

If you want to follow in Reverend Crummey’s footsteps, create a Crummey trust and have it buy a life insurance policy on your life. Why might this be a savvy strategy? Someday when you die, the trust will receive the insurance proceeds and pay them out to the beneficiaries listed in your trust... without being included in the value of your estate (for estate tax purposes).

When you're looking to pass on significant assets, a trust can be a powerful tool. Quality is important. While a "crummy" trust won't cut it, a "Crummey" trust just might do the trick. Reader advisory: Poor puns like this and others abound in a recent Forbes article about "Crummey trusts." Nevertheless, I thought it might inform your thinking on the subject.

A "Crummey trust" – so named after the case of Crummey v. Commissioner and the good Reverend Crummey himself – provides a means of legally avoiding estate taxes while passing on wealth to heirs... by combining an irrevocable trust and a life insurance policy. To create a Crummey Trust, you first create the trust and then have it buy a life insurance policy on your life. In the end, when you pass away, the beneficiaries of the trust inherit the proceeds from the life insurance policy without that money ever "coming in contact" with your taxable estate.

This strategy isn't without its challenges, however. One challenge is the risk of incurring gift taxes. However, as long as annual premiums are below the gift tax threshold of $13,000 per trust beneficiary (and you don't gift the trust beneficiaries anything else during the year in excess of that amount in combined gifts) you can stay in the clear.

The biggest challenge usually lies in the practice of sending out annual letters – so called "Crummey letters" – since the beneficiaries must be notified within very specific windows during which they may elect to withdraw the gifted funds. Failure on the part of the trustee to send out the letters can raise questions with the IRS and may upset the apple cart, so to speak, when seeking to qualify the annual gifts as falling within the annual gift exclusion. For this reason, many families find the safest approach is to engage a professional trustee to handle these notice letters and other administrative duties to ensure compliance.

Reference: Forbes (October 9, 2011) "With Trusts, ‘Crummey’ Is Good"