Dont Trust the Ball HolderIn other words, the old law from 2001 still kicks in again in 2013 with a $1,000,000 estate exemption limit per spouse, and that is based on having the proper legal documents that actually properly use the double exemption of both spouse’s to exempt the first $2,000,000, starting January 1st, 2013!  Just as the one year exemption is a “play” that most likely won’t be used from the government play book any time soon. (2010 estate owners that died, now have their choice to elect “unlimited” status regarding estate tax, but restrictions on tax “basis” on appreciated assets, or $5,000,000 estate tax exemptions with better tax treatment of appreciated assets) This two-year special “deal” everyone is frothing about as a great law, will pass by too very quickly. And with all the stuff that is due to hit the fan in the next two years, most likely is on the back burner again in Washington, and the burner is on “off”.  Hopefully, all of you reading this will still be here in two years. But surviving the next two years means the party is also over for big exemption amounts. That is without a needed amendment to make the temporary provisions regarding the estate tax – permanent. And, with cuts everywhere from national down to city governments — just how willing will Congress be willing to extend big breaks to the “rich” in a few years?

The law that alters previous laws by amendment, and  in a last-minute  political “band-aid” session last December, was meant to avoid the fact that we need more to count on as estate planners trying to do the best job for our clients. Even the official authenticated entry of H.R. 4853 in the GPO: Begun and held at the City of Washington on Tuesday, the fifth of January, two thousand tenmay be the Omen to warn us – temporary law can’t be taken serious. The bill was first introduced in the House March 16th, 2010. I know it’s easy to write the wrong year early in January. But, the official registrar can’t get the year right?  

I’m not the only one that feels the way I do about our temporary estate laws. Howard M. Zaritsky, a Rapidan, Va. estate planning expert who advises other lawyers in the field, says he’s telling practitioners not to base estate plans on portability until it become permanent. I quote his quote from Forbes magazine: “Congress has shown propensity for surprising us with both bad decisions and good ones, and you just cannot plan on Congress doing the expected or the right thing.”

This time around, the sunset clause comes back and is identical to the one  we thought would hit us in 2011. The only difference is that they moved the chains two years in advance, and raised the prior exempt estate limit of $3,500,000 (that applied only to 2009 deaths) to a temporary $ 5,000,000 exempt limit for 2011 and 2012 deaths only.

If you can plan on certain death, (I’m sorry to hear that), the only positive in your situation is that your terminal medical condition will allow the majority if not all of your estate to pass to your heirs tax-free now. That is unless you have more money than Howard Hughes did. The tax rate was lowered in this temporary amended law, to a flat 35% for the assets over $ 5,000,000. In 2013, the chains revert back to the $1,000,000 yard line, a huge penalty! 

And as I have said in a prior 2010 blog entry, the risk of having your children “help” you use the temporary law (obviously only a child demented) by the deadline will also come back December, 2012. Forget about predictions of the end of the world (it won’t happen) in December 2012. If you are still here and have really greedy dastardly heirs (or that demented child aforementioned), then be careful where they take you or of being isolated too much that last month when these higher limits apply and then suddenly run out at midnight. Seriously! One must wonder with these sudden “drops” in taxable estate assets programmed into the estate tax laws — is Stephen King secretly consulting with Congress?

Now, if you are married, the same marital exemption applies to your spouse in the amount of $5,000,000. That gives up to 10 million exempt assets if you can check out of life’s hotel, together before the midnight deadline I have already quoted.(I hope you understand I am not serious on this point) 

 The second most important portion of the 2010 law, at first glance, would appear to be a great new law provision. But, it won’t be around long enough, without further legislation, to help most families. Unlike any past estate tax law in this country, it gives a new “portability” feature we never had before.

Starting this year and through 2012, any unused portion of your $ 5,000,000 valued estate exemption on the first death you don’t use, will now carry forward to your spouse who dies last, as long as he or she also dies by December 31st, 11:59:59 PM. In other words, the odds are against you — to orchestrate joint deaths in such a tight time sequence, to ever trust these new provisions will be of much help for you. (Joint accidental deaths would be most likely)

You could compare it to the spousal rollover rules that apply to IRA accounts between married couples. The taxation of the funds is delayed until the second death if “rolled over” into the surviving spouses’ name at death – but never is the tax eliminated.

Though the portability clause is forward thinking, nothing guarantees in the current law you will ever get to use it even if something happened to you in the next two years. Your spouse too has to use it or lose it!  And, if your lawyer tells you to count on it, please give me a call as I have some ocean front property here in Arizona I would like to sell too!  Any financial advisor telling you to ditch your bypass trust setup needs to be recorded and documented for later use, just in case I am right. (Lucy pulls the football) 

Also, if your trusted legal advisor also is “sure” the portability clause in this patched up new law will be around as long as you are, kindly ask for a signed and notarized statement with proof of bond or errors and omissions insurance in force, as no one can make that guarantee!

The bottom line: Do you see Lucy pretty well itching to pull the football on you when you really do die?  I am afraid Lucy is the government and do you really trust Congress to do everything in the future, in your best interests? 

Thank goodness, the new law did permanently fix a problem with last years’ stepped up tax basis valuation rules. New provisions now reverse the damage from last year’s alternative capital asset valuation law that would have failed to allow full stepped up basis on appreciated capital assets over certain limits.  (when the federal estate tax was on a one year hiatus and a one year alternative law applied to taxation of appreciated capital estate assets)  So, there was some good from the previous bad law, that did came out of last month’s session. 

I am sure CPA’s and other estate accountants will enjoy all the fees the alternative capital appreciation tax laws caused in trying to properly value estate assets for future deaths of surviving spouses, when they lost their spouse last year. Some heir’s were facing eventual capital gains taxation on any assets over $1,300,000, until the change was made.

Also, assuming I convince some to keep their estate splitting strategies (kind of automatic in community property states), and also keep the bypass trusts in force, the improper use of A/B or A/B/C funding is a constant problem with the wrong formulas and wording.  

I have noticed this year after year, from the many wills and trusts I have read through when clients hire my certified legal document services. Trust and will provisions can quickly became out of date with lame solutions coming out of Washington lately. And, if you can’t guarantee your use of these short two-year provisions, (meaning your death/s are not imminent), then you better review and find out what your legal documents really say. 

The use of wording such as “the maximum current exempt assets”  that will pass federal estate tax-free, in your current estate plan documents could render your original plan to split the estate at the first death (if married), useless. No bypass funding will take place if you don’t write a concise funding formula, if one of you passes away in the next two years. Then, you could expose the kids or heirs to the tax rates and low limits that applied a decade ago! 

Lucy could slip that ball out on you at the last minute, when you kick the bucket (football) and you could fall down hard with a screwed up estate plan mess, and a big tax bill! Anything valued then over $1,000,000 and a starting 41% tax rate will give your kids a great appreciation of wishing they had written an estate plan that though complicated, covered the contingencies so many legal advisors gloss over. (failed trusts are great income generation vehicles for law firms)

As soon as January 1, 2013, there could be hell to pay for not listening to the experts now calling for “caution” in over-reliance on these new provisions. It takes cerebral work, to get it right for the future. (which is now less than two years away I must remind you of).  A custom convertible trust option should be created that allows any estate to properly be funded with as many tax saving or deferral sub-trusts (that is those A or A/B or A/B/C letters you may now have in your current trust), so that the law at the time of your death is applied and the solution necessary then to avoid or pay the lowest estate tax then, is properly applied and used.

It is not work for simple trust writers or simple thinkers. But, it is obtainable if you find a smart lawyer or estate document service with extreme knowledge and experience in these matters. With intelligent thinking and design, your outdated trust provisions can be fixed and corrected to allow the best chance to win the estate planning game.

Lastly, there are some opportunities in the new law, such as the ability to use your lifetime credits (gift and estate) to just give away a major portion of your estate direct to your kids or your other heirs. In other words, if you have $5,000,000 each, just liquidate and write out checks over the next two years to your beneficiaries. This way, you can be completely entertained in watching them spend your hard-earned money while you are still alive!

Seriously, bypass trusts protect heirs from themselves, bad marriages, lawsuits, and that Uncle you have and don’t trust… I think his name is SamNow is the time to look at the playbook again, and dig out your documents for a review. If you need some help here in Arizona, please give me a call, or send me an e-mail, if you want the proper wording in your amended (or new) revocable living trust. 

Lucy (Washington) still holds the estate tax football that will be used for your final game in life. Be aware and plan accordingly, for a sudden “pull” of the ball, at the last minute. It’s almost a sure fact! Smart moves can be made now, to anticipate Lucy and any future “bad” law coming next. The whistle is blowing….Let’s Play ball!

M.D. Anderson, AZCLDP 

Read More About It: Planning For A Disappearing Estate Tax Break by Deborah L. Jacobs / Forbes. com

Now, enjoy Lucy tricking Charlie Brown one more time…

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s