The three scenarios which every estate plan must address are:  (1) Congress acts, and passes a law that applies retroactively, (2) Congress acts, and the law does not apply retroactively (or retroactive application is found unconstitutional by the courts), and (3) Congress simply does not act!

            This means that the three most likely results are (1) the 2009 structure is extended.  This would result in a $3.5 Million exemption and a 45% estate tax rate; (2) a $5 Million exemption and a 35% estate tax rate would be in effect, or (3) the former $1 Million exemption with a top rate of 55% is reinstated.  In each case, estate plans must take into account the “gap” period (today’s “purgatory” situation where no estate tax is in effect while we “wait” to find out where we’re going!)

            Unless and until Congress acts, there will be no estate and generation skipping tax.  The gift tax is at 35% with a $1 Million lifetime exemption.  Finally, a new income tax system is installed to replace the revenue lost as a result of the estate tax repeal.  This system features a “carry-over basis” regime.  Under this system, there is no automatic death basis “step-up” as we’re used to.

            Under the 2010 system, estate planning document focus must shift to take into account a system that allows for a $1.3 Million step-up in basis allocation, and for married couples, properly addresses the opportunity to access an additional $3 Million step-up in basis allocation.  Documents must cover the current situation and also account for the potential reversion to the system used in the past.

            What can be done, proactively, about this confusion?  First, you should have your plan reviewed.  There are some situations that are more critical than others, but at least six situations can be improved by being proactive.

            First, any document prepared prior to 2001 would obviously not address issues raised by passage of the law in that year.  Everyone in that situation should have their plans reviewed.

            Second, anyone who dies this year is under the capital gains regime developed to “replace” the expiring estate tax.  If you or a loved one have health problems and are at higher risk of dying this year, you will need to determine the basis of your assets.

            Third, if you have developed a plan informally using the estate tax exemption amount to resolve differing distributions, you are at complete risk.  These plans would likely include blended families and charitably inclined people.  Those plans should be reviewed proactively.

            Fourth, all generation skipping plans should be reviewed so that you can be aware of the impact of the new planning landscape.

            Fifth, if you would be affected by a reduction back to a $1 Million exemption, your plan should be reviewed.

            Finally, documenting your planning intent is critical in changing times like these.  Doing nothing - because the estate tax has been “repealed” - is not recommended.

MY WILL

(According to the State)

            (1)       I leave everything to my surviving spouse, so long as I have no lineal descendants.

            (2)       If I also have surviving lineal descendants, all of whom are the lineal descendants of my surviving spouse, then I leave the first $60,000 of my estate, plus ½ of the balance of my estate to my spouse.  I leave the remaining assets equally to my lineal descendants, per stirpes.  (“Per Stirpes”, . . . what?)

            (3)       If I have lineal descendants who are not the lineal descendants of my surviving spouse, then I leave ½ of my estate equally to those lineal descendants, per stirpes, and the other ½ of my estate to my surviving spouse.     

            (4)       If there is no surviving spouse, I leave everything equally to my lineal descendants, per stirpes.

            (5)       If I have no lineal descendants, I leave all of my estate to my father and mother equally, or to the survivor of them.

            (Still reading?  Keep going, it gets better . . .)

            (6)       If I have no surviving spouse, lineal descendants or parents, I leave everything equally to my brothers and sisters, as well as the descendants of any deceased brothers and sisters.  (Say what?)

            (7)       If there is none of the foregoing, I leave ½ of my estate to my paternal relatives and the other ½ to my maternal relatives in the following order:

                        (a)       to the grandfather and grandmother equally, or to the survivor of them; or

                        (b)       if there is no grandfather or grandmother, then to uncles and aunts and descendants of deceased uncles and aunts; or

                        (c)        if there is either no paternal kin or maternal kin, the estate shall go to the other kin who survive, in the order stated above.

            It does keep on going until you completely run out of living relatives, but you get the point.

            Now that you know what the State of Florida has in mind for you, is that what you want?  Terrific!  Is it time you took charge and began your own planning?  Please give us a call and we can help.

            I have heard many people say something to the effect of “why do I need an estate planning attorney, I’ll just add my adult children to the deed on my house and add them to my bank accounts.  Then I won’t have to pay a lawyer to design an estate plan, nor will I have to pay probate fees.”  These “self-help” remedies ARE viable estate planning alternatives, if done properly.  However, if you do not have a complete understanding of the gift tax law and know the difference between a “completed” lifetime transfer and “incomplete” transfer, then you may know just enough to get into trouble.

            As the gift tax law now stands, everyone may give away up to $13,000.00 to another individual in 2010 without filing a gift tax return.   You also currently have a One Million Dollar ($1,000,000.00) lifetime gift tax exemption amount, so no gift taxes would be owed until you have given away over your lifetime a cumulative total of over One Million Dollars.  However, if you give a gift to any one individual in a calendar year that exceeds $13,000.00, then a gift tax return is legally required to be filed.  So, let’s look at how the gift tax applies to joint bank accounts and “adding a person to the deed”. 

            Adding an adult child’s name to your bank account does not result in a completed gift until the child withdraws money from that account.  If the child (or sibling or other friend or relative) withdraws more than $13,000.00 from that account in a calendar year, then you must file a gift tax return.  

            There are other problems with adding an adult child to the bank account such as:  is it your intent to “give” the child complete access to the funds or are you doing it just “in case of an emergency”? If there is no written agreement as to the use of the funds, misunderstandings can occur which could result in ugly lawsuits between family members.

            Contrary to the joint bank account situation, adding an adult child to the deed is a complete gift at the time it is made.  This is so even if you are retaining a traditional life estate in your home and giving only a remainder interest to the child.  This is a taxable gift of a future interest based upon the full value of that remainder interest.  If it is valued in excess of $13,000.00, then you must file a gift tax return for the year in which the child is “added to the deed”.

            The problem with not knowing enough to file a gift tax return is that, although no taxes or civil penalties would be due until you have given away over One Million Dollars ($1,000,000.00), there is a criminal penalty for failure to file a gift tax return which could expose you to a fine of up to $25,000.00 plus 1 year in jail.  So, without proper legal advice, it is not inconceivable that you could end up in jail for “adding a person to the deed”.

            The moral of this story is that before you can decide “I can do this myself”, stop and think whether you really know enough about the legal ramifications of what you are about to do.  Most of us have no trouble with calling a plumber or an electrician to perform work which we are not trained to do.  Consulting with a lawyer is no different – and sometimes even less expensive!

            Deciding on who should be a guardian for your children is a difficult question.  Often you will struggle just to find one person who you feel might do an adequate job.  Unfortunately, if that ideal person should die before you, then the State will name a successor guardian, if you have not done so.  We recommend naming at least a second and even a third alternate guardian, to avoid this problem.  Of course, an ideal solution is to have an ongoing relationship with your estate planning attorney, including an annual estate planning “check up”, so that your plan may be revised in a timely manner in the event of an unforeseen occurrence such as the death of the person you have named as primary guardian for your children. 

            This concludes our series on the Six Common Mistakes Parents Make When They Are Naming Guardians For Their Children.  Avoiding these mistakes is easy.  When you work with us – we specifically focus on the needs of parents – like you!

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            We are pleased to announce that we will offer a series of “Lunch and Learn” workshops on a quarterly basis in 2010.  The first “Lunch and Learn” will be from noon to 1:00 p.m. on Thursday, February 25, 2010 in the Learning Center in our office.  We will discuss Advance Healthcare Directives, Healthcare Surrogates and Living Wills.  These sessions are designed to discuss a topic of general interest in an informal setting.  Clients in the annual maintenance program will be given first opportunity to attend and if there are remaining seats, we will open the workshop up to other newsletter subscribers.

            The importance of expressing your wishes is that Florida has adopted the concept of “substituted judgment.”   In Re:  Guardianship of Browning, 568 So.2d 4 (Fla. 1990).  The concept of substituted judgment means that if a now incompetent patient has left instructions regarding life sustaining treatment, the patient’s surrogate must make the medical choice that the patient, if competent, would have made.  The surrogate is not to make a choice that he or she might make for himself or herself, or that the surrogate might think is in the patient’s best interest. 

            As the Florida Supreme Court has noted:  “It is important for the surrogate decision-maker to fully appreciate that he or she makes the decision which the patient would personally choose.  One does not exercise another’s right of self-determination or fulfill that person’s right of privacy by making a decision which the state, family, or public opinion would prefer.  The surrogate decision maker must be confident that he or she can and is voicing the patient’s decision.”  (Id.)

            Both a Healthcare Surrogate and a Healthcare Proxy must look to any evidence of the patient’s wishes and then substitute the patient’s judgment for their own.  If there is evidence as to what the patient would have wanted, that evidence prevails.  Only if there is no evidence may the Healthcare Surrogate or Healthcare Proxy consider the patient’s best interest.  If you feel comfortable leaving decisions about life-prolonging decisions to your healthcare surrogate, then the law will not second guess the surrogate’s determination of your “best interest”.  If you neither complete a Living Will nor Designation of Healthcare Surrogate, a Healthcare Proxy may be appointed for you by the court.  In those circumstances; however, there must be clear and convincing evidence that the proxy’s decision would be in your best interest.

            The Cramer Law Center regularly advises clients on healthcare directives and end of life decision making issues and prepares designations of healthcare surrogate and living wills for its clients.

            So, having learned how to avoid the first four mistakes, you have named short term and long term guardians for your children, specified what would happen if the couple you have named to act as guardians are no longer together, prepared a confidential document excluding anyone who might challenge your decision, and have provided necessary financial resources through life insurance or other means for the guardians to properly take care of your children.  However, in so doing you named your minor children as the beneficiaries of your life insurance policy.  Uh Oh!  Big Mistake!

            Minor children are not legally permitted to receive life insurance proceeds.  Naming them as your beneficiary guarantees that court involvement will be necessary in order for someone to be appointed to safeguard this money.  The court will supervise the money only until each individual child reaches the age of eighteen (18), at which time the child receives his share of the money outright, to be used as an eighteen (18) year old sees fit, including buying an expensive automobile.

            What you must do is not only name appropriate financial guardians for the children, but you should name either those guardians or a trust as the beneficiary on the life insurance policies themselves.  For example, if you have named your spouse as the primary beneficiary on your life insurance policy and your children as the contingent beneficiaries, the contingent beneficiaries likely would need to be changed to read, for example:  “Atticus Finch as guardian for Billy Sample” or as the “trustee of the Billy Sample Trust”.  By properly naming a guardian as the beneficiary of the life insurance proceeds, you will avoid the time and expense of a court proceeding to establish a guardianship.  You also will be able to make decisions to protect against your child receiving a substantial sum of money outright at age eighteen (18), by providing specific instructions to the financial guardians.

            Check with your estate planning attorney or life insurance agent to make sure the naming of your life insurance beneficiaries is done correctly.  Honestly, what 18 year old doesn’t want a Porsche!

            The family which is the subject of this film is comprised of Helene, the family matriarch, and her adult children, two sons and a daughter.  Juliette Binoche plays the daughter and is the most recognizable name in this fine ensemble cast.  Helene lives in a beautiful, large home in a small village outside Paris.  She has devoted her life to preserving the legacy of her uncle, a famous artist.  The home is filled with valuable paintings, antiques and other works of art.  The movie title refers to the times the family spends together on summer vacations at Helene’s villa.

            On the occasion of her 75^th birthday, the children and grandchildren all gather at the estate to celebrate.  Helene has recently published a well-received book of her uncle’s work.  The family gets along in a genial, but superficial manner.  Helene takes a few minutes to talk with her eldest son about her testamentary wishes although she refuses to visit a lawyer to prepare a formal estate plan.  The other children are not involved in this discussion.

            After Helene’s death, the children meet to discuss disposition of the family wealth.  The eldest son wishes to preserve the ancestral home and its treasures for family visits and for future generations of the family to enjoy.  He lives in Paris and can look after the estate.  However, his brother is moving to China and his sister lives in New York.  Their goals are not the same and they vote (2-1) to sell everything.  At that point, a lawyer does become involved and advises about the heavy taxes which will be due.  Accordingly, some of the treasures are donated to the Musee d’Orsay.  The film ends on a wistful note as the children go their separate ways and the eldest son and his wife view their mother’s desk and chair in a sterile setting in the museum.  Although sad, the film is not depressing.  It is beautifully done, with fine acting, gorgeous scenery and a universal theme – the conflict between preserving the past, the cultural heritage and memories of a family, and the relentless pull of the present and future.

            What stands out for me is what wasn’t done.  And I am not just talking about Helene’s failure to consult a lawyer to do comprehensive estate planning.  As the film ends and the siblings go off in their different directions, the viewer senses that there will be no more “summer hours” for this family.  However, if the family had ever sat down together to talk about family values and philanthropy and to make philanthropy an important family business, they may have been able to continue to spend quality family time together into the foreseeable future.  The interaction in this family is the typical, surface interaction of many families today.  There is a reluctance to discuss deeply held values or to develop a common family mission, which leads to a lack of authentic trust among the family members. 

            If instead Helene had started a family foundation, perhaps requiring all heirs to participate in a family council which would decide foundation business, the family may have agreed upon a common mission that would keep them strong and together well into the future.  Perhaps a fund could have been established to pay for the family travel expenses to attend foundation meetings, so that every family member could attend regardless of their location or circumstances.  Then, no matter whether or not this particular home was sold, preserving the family’s legacy and developing a common philanthropic mission could have set the stage for this family to spend many more “summer hours” together.  This opportunity would not have been missed if the family had spent time with a legacy oriented estate planning attorney.

            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.

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!

            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.