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Archive for December, 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  What most people don’t know is that also repealed along with the tax is the provision which allowed beneficiaries to receive a “stepped up basis” in assets which they inherited.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.

Categories : Newsletter
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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!

Categories : Newsletter
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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.

Categories : Guardianship, Newsletter
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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. 

Categories : Wills
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