Michigan Estate Planning Lawyer Blog

As a Detroit Federal Estate Tax estate planning lawyer, I keep up on the latest goings on with the Federal Estate Tax debate.

Dan Duncan, a billionaire, who made his money in oil and gas has recently passed away. Forbes magazine had him listed as the 74th wealthiest person in the world.  His estate was valued at $9 billion.  Had he lived until Jan 1, 2011, his estate may have paid up to 55% of that $9 billion to the United States government.  Instead, because of congress' failure to address the Federal Estate Tax, there is no estate tax due.

The United States has had a Federal Estate Tax since 1916.  When Rockefeller died in 1937, his estate had paid a 70% tax according to a nytimes.com article.

It will be interesting to see if Congress acts before we go reach 2011.  Will the estate tax exemption amount fall back to $1 million?

The Federal Estate Tax debate has been heating up for a while. Lexis has put together a nice little summary that I wanted to share, but hadn't had a chance to. You can read the Lexis summary at "What's Cooking with the Estate Tax" by Deirdre R. Wheatley-Liss.

U.S. Rep. Linda Sanchez has introduced new legislation to restore the estate tax. Her bill entitled the Responsible Estate Tax Act calls for a progressive tax rate starting at 45% and a $3.5 Million exemption. Included in her bill are the restrictions on GRATs that we've seen discussed as well as an additional tax on estates above $500 million. You can read her press release on the bill here: Legislation to Shift Tax Burden Back to Billionaires.

In other Federal Estate Tax news, Nancy J. Altman, who is the co-director of Social Security Works, testified before the House Ways and Means Committee on the need of Social Security.  During her testimony, she proposed reinstating the 2009 Federal Estate Tax rules and dedicating a portion of the proceeds to fund Social Security. Her testimony can be read here.

George Steinbrenner, who in 2009, according to Forbes, had an estate worth $1.15 billion passed away recently making him another who has joined the growing group of billionaires and millionaires who have passed away in a year where there is no estate tax.

The way the current estate tax rules work, there is no estate tax due in 2010. Compare this to if Georgoe Steinbrenner passed away in 2011, when there is only a $1 million exemption and anything over $1 million would be taxed at up to 55%. For example, say an individual with a $5 million estate passed away in 2011. That estate could generate nearly $2 million in taxes.

For more on George Steinbrenner's passing, visit nytimes.com and George Steinbrenner, Who Built Yankees Into Powerhouse, Dies at 80.

The death of the 74th richest person in the world occurred on March 28th. Dan Duncan's estate has been valued at $9 billion. Had Mr. Duncan passed away in 2009, theoretically, his estate could have generated $4 billion in estate taxes for the IRS. However, with the way the law works, in 2010, there is no estate tax.

Mr. Duncan is the first billionaire to pass away in this year without an estate tax. The Trust Advisor Blog has a great article on the topic. The bottom line is that a revenue strapped Congress may follow through on their 2009 threats of passing a retroactive tax bill that would reinstate the estate tax (which comes back in full force in 2011).

You can read the Trust Advisor Blog at: Billionaire's Heirs First to Win 2010 Estate Tax Jackpot.

In not unexpected news, business lobbyist who have been fighting against the estate tax are now hoping for a change in Federal estate tax legislation according to a Business Week article (Business Lobbyists Push to Revive Estate Tax).  Business groups have changed their positions in hopes of heading off the higher taxes on the horizon.  In 2011, the Federal Estate Tax is coming back with a vengeance and will heavily tax any estates over $1 million dollars.

Michigan' Senator Levin is on the Senate committee that will work to retroactively reinstate a federal tax on multimillion-dollar estates that expired Dec. 31. The Federal legislation, most likely, will seek an extension of a 2009 law, which applied a 45 percent tax rate on the value of estates that exceeded $3.5 million per individual.

"The sooner we do it, the better," Levin said in the Business Week article, which you can read at Levin Says House to Begin Extension of Bush Tax Cuts.

Because the governement took no action at the end of 2009, the estate tax was replaced Jan. 1 with a capital gains tax that requires heirs pay rates of between 15 percent and 28 percent on any bequeathed assets they sell.

The tax is complicated because it applies to all profit since the assets were acquired by their original owners.

If you listen to the news and talking heads you would think that with our 2010 "repealed" estate tax, everything is wonderful for those who want a low overall tax burden. Well, that might not be the case. Take a look at this Wall Street Journal article entitled "Why No Estate Tax Could Be a Killer."

The article points at that while there is no estate tax to speak of, under current law, in 2010, there is a change in how the capital-gans tax rules are handled.  According to the article, estates with assets between $1.3 and $4.3 million would have been better off under last years estate tax rules, while bigger estates will have more of a tax savings this year.

Where do we go from here?  Who knows.  We all thought that the $3.5 million exemption amount we had last year would have been frozen and carried forward.  However, our government took no action.  The later we get into 2010, the more that I think we will look at the estate tax exemption coming back at $1 million per the current law for 2011 and beyond.

Either way, it is important that your estate plan be reviewed to make sure that the Federal Tax planning strategies that were used are still sufficient.

What a mess Congress has created! We are now in a year where there is no federal estate tax - but hold the cheers. Congress has substituted another method of taxation that will collect more taxes from many of our clients and families than the estate tax. Additionally, as has been reported in the local and national press, these changes will, for some, greatly alter the planned for and anticipated distributions among family members and heirs.

A brief review of the law will help explain why this is so significant. The 2001 tax act, signed into law by President George W. Bush, gradually reduced the maximum rate of the federal estate tax (and the equally onerous generation-skipping transfer tax on transfers to grandchildren) from 55% to 45%. It also gradually increased the amount of property that you could pass free of federal estate tax from $675,000 per person in 2001 to $3.5 million per person in 2009. That means that with basic estate planning, a married couple could pass up to $7 million free of federal estate tax, if they both died in 2009.

Then, in 2010 only, the 2001 tax act repeals the estate tax. But like a horror film character who just won't die, under the existing law the estate tax returns again on January 1, 2011 - only at a much lower $1 million exemption and a higher maximum 55% tax rate! This strange "now it's gone, no it isn't" effect is the result of a rule in Congress that attempts to limit budget deficits.

Paying for Estate Tax Repeal

To pay for this one-year vacation from the estate tax, Congress replaced the estate tax with an increased income tax. Before 2010, any assets that pass to someone when you die would be valued at fair market value at the date of death. Thus after death, when a surviving spouse or heirs sold any assets (like securities or a home) that had increased in value, they would not have to pay income tax on any of that growth that occurred during your life. (This is referred to as a "step-up in basis.") For many heirs this means huge income tax savings, oftentimes tens of thousands of dollars or more. 

But in 2010 property that passes at death does not automatically receive this step-up in basis. Instead, each individual has a limited amount of property that can be "stepped-up" in value at the time of death. Property that does not receive this step-up value will be subject to tax on all increase in value from the date you first acquired the property. This means that the property could be exposed to tens of thousands of dollars of income tax liability for your heirs!
Not surprisingly, these rules are convoluted and in many cases very different from the old law. In fact, Congress attempted to institute a similar tax structure in the 1980s and it was repealed, retroactively, because it was too difficult to administer. Because of past experience as well as the anticipated difficulties in calculating such a tax, the common belief was that Congress would change the law before January 1, 2010. But it didn't. 

How You Are Affected?

This law can affect you in several ways. For married couples as well as single individuals, we need to first make sure that your property will be divided according to your desires, and not dictated by Congress. For more than 50 years it has been common to use a written mathematical formula to divide the assets of a married couple when the first spouse dies to maximize estate tax savings. Likewise formulas have been used to provide funds for charitable causes and to benefit family and friends. Now, in 2010 when there is no estate tax, these formulas will not work. If a spouse is not your sole beneficiary (for example, if you have children from a prior marriage), the existing formula could result in the disinheritance or substantial reduction of resources provided for the surviving spouse. 

What Should You Do?

As Michigan estate planning attorneys, we encourage you to meet with us as soon as possible to review your estate plan and make any changes that are necessary for this law. We need now to ensure that your property is positioned to receive the maximum step-up in basis increase available under current law. This is a time that demands a new approach to your planning with new thinking and building in flexibility to see that your wishes are fulfilled no matter what Congress will throw at us this year or next. We have solutions that will meet you planning objectives with the least amount of tax impact.

Of the 200 that voted no in the House on making the Federal Estate Tax permanent, 26 Democrats joined all the Republicans present according to the Washington Post. Again, now it's up to the Senate with a December 31st deadline to take the issue by the horns. It will be interesting to see if the House's approach will be adopted by the Senate.

The AP is reporting that the House of Representatives just voted 225-200 to permanently extend the $3.5 million estate tax exemption.  Included in the bill is the portability feature, that will allow married couples to shield effectively double what the exemption amount is from the Federal Estate Tax.  Stay tuned.  Next up the senate.

Read the AP story here: Estate Tax Vote

It looks like the House Democrats are looking for a 1 year fix to the Federal Estate Tax issue. As the law currently stands, at the end of this year, there will be an unlimited estate tax exemption. Then come 2011 and beyond, the estate tax exemption will be at $1million. Meaning anyone who passes away with over $1million will get taxed at 55%. Well the House Dems are looking to slap a band-aid on the estate tax issue by continuing this years rules into 2010.

You can read the article from www.nasdaq.com here: House Democrats to Ditch Permanent Estate Tax Bill for 1-Year Fix.

Many clients ask us what are the benefits of having a revocable living trust in Michigan.  There are a few benefits to a properly planned living trust prepared by a Michigan trust and estate planning lawyer.

First, a properly funded living trust can avoid the Michigan probate process.   Assets that pass through a living trust from the grantor to the beneficiaries or that are held in trust for the beneficiaries avoid the Michigan probate system.  A last will and testament does not avoid probate.  A Michigan living trust will avoid Michigan probate, if properly funded.

Second, as a grantor, you are able to exert far more control over your assets and how the are distributed.  For example, you could create a Michigan revocable trust where, when you pass away, your assets are held in trust for the benefit of your children for a period of time, shielding those assets from poor financial decisions of your children or lawsuits, or creditor claims.

Third, you are able to do sophisticated Federal estate tax planning strategies. 

Most people look to the living trust for the first two benefits, probate avoidance and control over their assets. 

If you have any questions on how to set up a properly drafted Michigan living trust, please contact a Michigan estate planning lawyer.

-Christopher J. Berry, Esq.
Bloomfield Hills Trust and Estate Lawyer

The WSJ has an interesting piece on how Obama's budget plan quietly resurrects it self in 2010. 

As we've discussed before, the Federal Estate Tax exemption level this year is $3.5 million.  Under the current law, that exemption will be unlimited next year.  Meaning there is no Federal Estate Tax.  So, Bill Gates and his wife could pass next year leaving their billions to whoever they wanted, estate tax free.  Then, come 2011, the estate tax is coming back in at $1 million.

Well, we've blogged about before regarding the direction the Federal Estate Taxes are headed. The current thought is that there will be an estate tax freeze, freezing the current exemption of $3.5 million for next year and beyond.  This really isn't news, as Obama has been talking about this since he was campaigning.

The WSJ article, which you can read here, says that this is Obama's underhanded way to sneak an added tax responsibility on unsuspecting Americans.  My thought is that this has been anything but a secret.

-Christopher J. Berry, Esq.
Michigan Wills, Trusts, and Probate Lawyer

Yesterday at the Michigan Estate Planning Lawyer Blog I discussed two things to look for in your estate plan in this environment of a $3.5 million Federal Estate Tax Exemption and a down economy.  You can read that post here: Michigan Estate Planning Lawyer Blog.

Today we are going to cover three more items to consider in this estate planning legal environment

This down economy and economic crisis can increased the risk of bankruptcy, foreclosure, divorce, and law suits.  On top of this, your beneficiaries irresponsibility in financial management may also reveal it self since times are tight.  Now is a time to make sure that the spendthrift provisions in your revocable living trust (assuming you have a revocable living trust and want to protect your beneficiaries) are iron clad.

The next item to consider with the increase of the Federal Exemption is the need to rebalance trusts that try to minimize the effect of the Federal Estate Tax.  Typically a husband and wife will have a separate trust.  The goal being to stuff each trust up to the Federal Exemption amount, which this year is $3.5million.  Last year the exemption amount was only $2million, so there may be a need to rebalance the trusts.

One bright spot of the economic crisis is the opportunity for gifting.  Gifting is a way to reduce an estate value estate and gift tax free.   This year $13,000 can be passed gift tax free.  This is an increase of $1000 from last year.  Couple this increase with the 50% loss of value for many peoples portfolio and we now have a great opportunity to gift.

These are turbulent times for everyone.  You should sit down with your Michigan estate planning attorney to see how these changing times have effect your estate plan.

-Christopher J. Berry, Esq.
Oakland County Estate Planning Lawyer