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Archive for 2009

Why the Estate Tax Repeal in 2010 May Hurt Many Americans

Monday, December 28th, 2009 by

There is a hidden trap for middle-income Americans in the repeal of the estate tax for 2010.  What most people don’t know is that also repealed along with the tax is the provision which allowed beneficiaries to receive a “stepped up basis” in assets which they inherited.  Many Americans who inherit assets in 2010, without that stepped up basis, will be exposed to a capital gains tax on the increase in value from the time the assets were initially purchased until the time they are sold. 

 

            Those wage earners in the lowest income tax brackets (10% and 15%), which includes married couples earning up to $61,300.00, will be somewhat protected by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), because that law dropped the capital gains rate for people in those brackets to 0% for the years 2008 through 2010.  (But, if the gain on inherited assets puts you over that amount . . .)  For a large number of Americans in the 25% – 35% brackets, capital gains taxes on the sale of inherited assets will be owed, when no tax would have been owed had the current estate tax law remained in effect.

           

            In 2009, everyone had a personal estate tax exemption of $3.5 million dollars.  Accordingly, if a person died in 2009 with less than $3.5 million dollars in assets, all of those assets could be devised to their loved ones without any estate tax.  Additionally, those assets would have passed with a “stepped up” basis, meaning that the beneficiary would inherit those assets at the monetary value of the assets on the date of the decedent’s death.  In 2010, there only will be an exemption for the first $1.3 million dollars of capital gains within an estate.  It is estimated that 70,000 estates will owe taxes under this “repeal”, whereas only 5,500 estates would have been affected had the current estate tax law remained in place.

 

            To illustrate:  Suppose Dad already has passed away and Mom died in 2009.  You are her beneficiary.  At the date of her death, she owned the family home in which she has lived the past 40 years.  It had a value of $510,000 on Mom’s date of death.  It was purchased 40 years ago for $10,000.  Mom also left oil stocks valued at $1,510,000, which had been inherited from her grandmother.  When her grandmother purchased those stocks many, many years ago, she paid $10,000. 

 

            In 2009, because this estate was valued at $2,020,000, no estate tax would have been due.  (estate is less than 3.5 million)  You would have inherited the home, with a basis of $510,000 and you would have inherited the stock with a basis of $1,510,000.  If you then turned around and immediately sold each asset for those prices, you would have owed no capital gains tax from the sale.  Total tax to the estate would have been zero.  Total tax to you would have been zero.

 

            Now, compare what happens if Mom dies in 2010 under the same scenario.  Again, there is no estate tax to Mom.  However, if you turn around and sell the home and the stocks for their face value, you will owe capital gains tax on $2 million dollars in gain.  ($2,020,000 value – $20,000 cost).  After your 1.3 million dollar exemption, you would pay 15% capital gains tax on $700,000.  This will result in a $105,000 tax bill for you in 2010, which would NOT have been owed had the current estate tax law been continued.

 

            In this example, tax would be owed even if you are in the 10% or 15% tax bracket because the 0 % capital gains tax rate only applies to gains, which added together with your income, would still fit within those brackets.  So, if you and your spouse together earned $60,000 and then had a $2,000,000 capital gain from the sale of inherited assets in 2010, you would pay the full 15% ($105,000) on the sale of those inherited assets. 

 

            If you are married, it is even worse.  Under the current law, you could leave your entire estate to your spouse tax free.  Now, you only can leave $4.3 million dollars in assets with capital gains to a surviving spouse. This is a large amount, but it is not unlimited like it has been for decades.

 

            Accordingly, a significant number of Americans who receive inherited assets in 2010 will be worse off for the repeal of the estate tax.  Who is better off?  . . .  the extremely wealthy, those one percent (1%) of the population who may have estates worth more than $3.5 million and pass away in 2010.  Then, instead of an estate tax rate of 45% on the amount of assets greater than $3.5 million, the beneficiaries of those estates would pay only a 15% capital gains rate on the actual capital gains owed on those inherited assets. Thus, the repeal of the estate tax in 2010 is a boon for the most wealthy among us, of little concern to the least wealthy, but is a major concern to many people in the middle.

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TALKING TO LOVED ONES ABOUT WHAT REALLY MATTERS

Tuesday, December 22nd, 2009 by

The Holidays” can mean travel, excitement, gathering together with those you love, stress, conflict, and any or all of these things!

We wish you the happiest of holidays.

 

            We also urge you to take the time this holiday season to talk with those you love about what’s truly important to you, and what’s important for them to know.  Make sure you tell them that you love them.  Make sure you tell them about your estate plan, about where they can find your important legal and financial documents in an emergency, and who your important advisors are (e.g. estate planning attorney, financial advisor, accountant).  We understand that these conversations with family members can be difficult to start.    But they are important.  Talk to those you love about the legal, financial and health care decisions you have made, and take the time, while you still can, to explain your choices.

 

            Talking about your healthcare directives can be a good lead-in to talking about your other personal and financial choices with those you love.  It’s important – for you and for them.  Take this extra step to ensure that everyone knows what you want while you can still answer questions and provide feedback.  And then eat a lot, annoy your little sister, have a wonderful time, and enjoy your holiday!

 

            We wish you the best holiday season.  Our offices will be closed from December 24, 2009, to December 28, 2009, and from December 31, 2009, to January 4, 2010.  We look forward to working with you next year!

 

 

            Happy Holidays!

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YOU HAVE NAMED EBENEZER SCROOGE AS YOUR CHILDREN’S GUARDIAN.

Monday, December 14th, 2009 by

This newsletter continues our series on the six common mistakes parents make when naming guardians for their children.  MISTAKE #4.  YOU MAY HAVE CONSIDERED FINANCIAL RESOURCES OF POTENTIAL GUARDIANS WHEN DECIDING WHO SHOULD RAISE YOUR CHILDREN.

 

            In thinking about who to name as guardian, you wanted to make sure that your children would not go wanting and that the person you named could afford to feed, clothe and educate them.  So you decided to name your rich Uncle, Ebenezer, to serve as their guardian.  Old Uncle Ebenezer is very wealthy, good with money and can easily afford to raise your children.  Unfortunately, although Ebenezer has money, there is much else that he lacks.  In fact, naming him as guardian might actually be detrimental to your children.

 

            Your children’s guardians will be the people in charge of their emotional, spiritual, and physical well-being, not necessarily just their money.  It is your responsibility to leave enough money behind to take care of your children, either through savings or an adequate amount of life insurance.  You even can choose to name one set of guardians to take care of the children personally and another set of guardians to take care of your children financially, if the best choice of guardians is not “good with money” people.

 

            It is far more important that you choose a guardian that matches your list of parenting values rather than one who is financially independent.  Providing your children with love and good values should be a prominent consideration.  Ebenezer’s “Bah Humbug” ! attitude likely would not be your first choice in desirable character traits for your child’s guardian.

 

             Another important point is that not only parents, but also grandparents, can ask about these important questions.   Don’t let “Bah Humbug” ruin the spirit of your children or grandchildren!   Any grandparents reading this issue should feel free to pass this newsletter on to their children.

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Making a Horror Film Out of “The Reading of the Will”

Tuesday, December 8th, 2009 by

        “The Cat and the Canary”, initially done as a silent film in 1927 and then remade as a “talkie” in 1978, brings the subject of estate planning squarely into the horror film genre.   On a dark and stormy night, several relatives gather in an old mansion to hear the reading of the Will of Cyrus West, their very wealthy ancestor.  When the Will is read by his attorney, the old man reveals how much he despised his worthless next of kin.  As a result, his Will is structured in such a way as to inspire conflict among his potential heirs to see who will collect his fortune.  The heirs are locked into the mansion for the night during which strange, creepy people are roaming the halls.  Stay in your rooms and lock the doors!!

 

            For most people, the purpose of proper estate planning is to avoid conflict among your loved ones.  If Cyrus West came to me and said that his primary estate planning goal was to incite his heirs to plot to kill each other, I would politely send him on his way.  However, it does make for an entertaining, if unrealistic, movie. 

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BRING ME A PEN AND PAPER!

Wednesday, November 25th, 2009 by

        

(Deathbed Wills)

 

          Writing a Will on one’s death bed is often featured in the movies, but is a bad idea in real life.  In “Power of the Press”, a 1943 film written by Samuel Fuller, the publisher of a New York newspaper, is stricken with remorse after a long time friend’s editorial lambasts the muckraking journalism of his newspaper.  He decides to force out the managing editor who is leading the newspaper astray.  However, the managing editor has the publisher assassinated as he begins a major speech to outline the new change in policy.

 

            While the publisher is lying on his deathbed, he summons his trusted secretary to bring him a piece of paper and a pen and he writes out a Will leaving his controlling interest in the newspaper to his old friend who had criticized him.  That old friend was running a small town weekly newspaper in Nebraska.  The intrepid secretary tracks him down and brings him back to New York to confront the ruthless editor.  They show the editor the handwritten Will.  At first, he permits the reformist to have the illusion of control, but as real changes are attempted, he obtains a court injunction declaring the handwritten Will to be void.  The small town newspaper man and the secretary do not have the funds to fight this injunction, so other tactics are required.

 

            This movie is more well known for its somewhat preachy (remember this was war time) defense of freedom of the press.  The estate planning lesson is that in the movies, as in real life, a deathbed Will is not the best planning tool.

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YOUR CRAZY UNCLE IS DEMANDING TO BE YOUR CHILDREN’S GUARDIAN!

Thursday, November 12th, 2009 by

This is the third newsletter in our series discussing the 6 common mistakes parents make when naming guardians for their children.          Mistake #3:  You probably did not exclude anyone who might challenge your decisions or who you know you would never want raising your children.

           

            Have you thought about excluding someone who might challenge your guardianship decisions or who you are certain you would never want raising your children?  In every family, there is at least one relative that you just try to avoid.  Whether it is crazy Uncle Leo or snobby sister Jennie, you know that under no circumstances would you ever want that person to raise your children.  However, (a very important word here!) if you do not spell out your concerns in writing, who do you think would be the first person to approach the Court and ask to be named guardian of your children?  So, what can you do to prevent this from happening?

 

            In our comprehensive Children’s Protection Plan, we include a document called “Confidential Exclusion of Guardian”.  This document is meant to see the light of day only if crazy Uncle Leo really does ask to be named guardian of your children.  In this document, you would list anyone who you absolutely would not want to serve as guardian and you will list all of the reasons why you feel that way.  These reasons usually are sufficiently embarrassing enough to the person you have named that they would not want them made known and likely would withdraw their challenge to your choice of guardian.  (For example:  “I am concerned that Uncle Leo’s 20 year history of alcohol abuse, including 2 DUI’s, would compromise my children’s safety.”)

 

            By planning ahead and addressing all contingences, you can select the right guardians for your children and also exclude the wrong ones. 

 

            It sounds like a broken record – - – but planning …….. works …… try it!

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MOVIE REVIEW: “EMMA” AND SECOND MARRIAGE PLANNING

Tuesday, November 10th, 2009 by

We previously reviewed the Frank Capra film “You Can’t Take It With You”. Another movie with estate planning overtones is the 1932 classic “Emma”, starring Marie Dressler in an Oscar-nominated role.  Emma is the story of an elderly housekeeper who cares for a motherless family, actually raising the youngest, Ronnie, when his mother dies in childbirth.  The entire family is very dependent upon her.  The father, Frederick Smith, becomes very wealthy.  The children grow up in wealth and, with the exception of Ronnie, become spoiled brats. 

 

            When Emma leaves for her first vacation ever, Mr. Smith accompanies her to the train station, buys an extra ticket for Niagara Falls and proposes.  The two have a short period of happiness before Mr. Smith’s heart gives out and he dies.  In his Will, Mr. Smith leaves all of his money to Emma with the understanding that she take care of the children, whom he believed would squander every cent if left unsupervised.  The children assume Emma is going to take all of the money for herself.  In order to break the Will, they accuse her of murdering their father and Emma actually is put on trial for murder.  Ronnie is away hunting in the wilds of Canada and doesn’t learn what is going on until after the trial is underway. 

 

            Frederick Smith incorrectly assumed that because Emma was like a member of the family, the children would readily accept her.  Even with a “pretty good for the movies” lawyer, Mr. Smith was unable to avoid a family tragedy with his estate planning.  Instead of leaving his entire fortune to Emma, perhaps if he had left his assets to the children in individual, lifetime protected trusts, he could have avoided their resentment.  He could have named Emma as either a trustee or co-trustee and still accomplished his main objective of protecting the children from their spendthrift ways.  The tragedy that ensues exemplifies the need for extra special care in estate planning when there are blended families and second marriages involved. 

 

            Unfortunately, Emma is not presently available on DVD.  Try to catch it when it next plays on TCM.  The movie is extremely well-acted, genuinely touching and not at all outdated.  You don’t have to be an estate planning attorney to enjoy it!

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Special Anniversary Edition

Tuesday, November 10th, 2009 by

Well, well… It was 25 years ago today that I hung out my shingle on a vintage house built in 1906 (behind a car wash) in Pensacola, Florida.  The car wash was the source of many jokes at my expense!  I scrounged up some used furniture, bought a brand new IBM Selectric typewriter and hired a legal secretary with sensible shoes.  The Law Office of Jeffrey A. Cramer was open for business.  The practice grew and we opened a second office in Jacksonville over 16 years ago.  The commute back and forth while managing 9 attorneys and 26 support staff in offices 350 miles from each other started to become more management and less law.  I had a decision to make, and my decision was to focus my efforts on Jacksonville. So, here we are today folks.  I want to thank all of you who have put your faith in us over the years and we look forward to the next 25 years!

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Mrs. Astor Regrets

Monday, November 9th, 2009 by

This week I thought that I would share with you some comments on an interesting book I just finished:  Mrs. Astor Regrets by Meryl Gordon.  This is the story of Brooke Astor, the last Mrs. Astor, who lived one hundred and five years before passing away in August, 2007.  The book is captivating because it tells the story of one of the richest women who ever lived and is full of anecdotes about the rich and famous.  The Rockefellers, the Whitneys, Henry Kissinger, Tom Brokaw, and Oscar de la Renta are just a few of the famous names that moved in and out of Brooke Astor’s life.  These stories alone make for fascinating reading.

 

            However, it is the subtitle of the book “The Hidden Betrayals of a Family Beyond Reproach” that makes the book riveting.  Who really expects or plans to live to age 105?  What happens when an 80 year old son is tired of waiting for his inheritance? 

 

            When John Jacob Astor went down with the Titanic, he left $87 million to his son Vincent.  Vincent later married Brooke.  When Vincent Astor died in 1959, he left an estate worth over $120 million.  $60 million was left in trust for his wife and another $60 million was left to the Astor Foundation.  Brooke Astor was well known for her active philanthropy as the head of the Astor Foundation.  Over the next 40 years, she gave away $200 million to New York City charities, making her the most influential person in the City.  She also lived the “good life” and thought nothing of wearing a $250,000 necklace when dressing to go out for dinner. 

 

            Brooke Astor lived a vigorous and active life right on through her 100th birthday party, but her mental and physical health then began to deteriorate.  Her last years of life became tragic because she did no disability planning.  The richest woman in America did not have a Revocable Living Trust.  Instead, her estate planning was confined to a Will and many codicils (she changed her Will 38 times). 

 

            As her mental health deteriorated, her only son “took over” and acted in ways that ultimately resulted in his being indicted on criminal charges of elder abuse and theft.  He cut his mother’s staff, shut her up in her Park Avenue apartment, isolated her from her friends and seriously diminished the quality of her healthcare.  As a result, her close friends, led by Annette de la Renta, filed a court petition to have a formal guardianship established.  Needless to say, the filing of this guardianship petition was heaven for the tabloids and the family tragedy was page-one news in every New York newspaper.  Eventually, Annette de la Renta was appointed as Brooke Astor’s guardian and Mrs. Astor’s last year of life was made more tolerable. 

 

            The irony is that the world’s richest woman could have avoided this entire spectacle had she planned for disability by establishing a Revocable Living Trust, leaving specific instructions and appointing someone she trusted to administer her affairs according to those instructions, if she became mentally incapacitated.  Her failure to do so resulted in a family tragedy of Shakespearian proportions, tabloid headlines, millions of dollars of attorney’s fees and her only son being indicted.  His criminal trial is going on right now, providing more grist for the tabloids’ mills.  (see:  http://www.nypost.com/seven/07082009/news/regionalnews/manhattan/marshall_collapses_in_courthouse_mens_ro_178228.htm) 

 

All of this could have been avoided by a common estate planning technique that is readily available to everyone, not just the mega-rich.  Don’t let a similar family tragedy occur to you, your friends, or clients.  Everyone needs to plan for the potential of being alive, but mentally incapacitated.  Estate planning is not just about what happens after death.  Brooke Astor’s final years are a fascinating testament to this fact.

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MICHAEL JACKSON’S ESTATE PLAN

Friday, November 6th, 2009 by

Well, since there is no way you have been able to hide from the media frenzy, I will add my comments about the talented entertainer who hails from my wife’s home state! 

 

Michael Jackson, it appears, engaged in thorough and thoughtful estate planning, by establishing a Revocable Living Trust.  This means Mr. Jackson’s pertinent provisions about the distribution of his wealth would be written down in a Living Trust document, which is entirely private.  The Will, which has been made public, is a standard “Pour Over” will that says any wealth not previously transferred to the Michael Jackson Family Trust should be transferred to the Trust after his death.  The Will also explained who are the preferred guardians for Michael’s minor children.  The Trust probably names Trustees to manage the financial assets and wealth for the children.  Michael Jackson created an estate plan designed to make sure his wishes were kept private.

 

The media, whether newspapers or TV “talking heads”, are clueless about estate planning ideas.  The media does not understand the difference between a Trust and a Will.  It might have helped many people had the media understood the basic concepts.

 

It is so important to be totally informed before making life decisions, and Michael Jackson did his homework when it came to his children and family wealth.

 

At the Cramer Law Center, that is our goal, to educate and help you make the best decisions for you and your family.

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