100 Years
Facebook Linked in
Davidow, Davidow, Siegel & Stern, LLP
Long Island's Elder Law, Special Needs & Estate Planning Firm

Thursday, December 23, 2010

Portability Provision of Estate Tax law may be "Wolf in Sheep's Clothing"

The new Estate Tax law may create complications for middle class married couples: The recently enacted Tax Relief Act of 2010 brings back the federal estate tax with a whimper not a bang. But one provision, intended to help married couples, may result in new tax complexities and expense for those of even very modest wealth.

Under the new rules, individuals who die in 2011 or 2012 will have an exemption amount of $5 million dollars (reduced if they made large gifts during lifetime). If their taxable estate does not consume the entire $5 million exemption, the unused portion can be passed on to their surviving spouse. However, the unused exemption amount is available to the surviving spouse only if an election is made and the amount is calculated on a timely filed estate tax return of the deceased spouse. This estate tax return must be filed to pass on the unused exemption even if no return is otherwise required.

In its December 10th technical explanation of the provisions of the law, the Congressional Joint Committee on Taxation gives the following example of how this "portability" provision will work:

"Example 1: Assume that Husband 1 dies in 2011, having made taxable transfers of $3 million and having no taxable estate. An election is made on Husband 1's estate tax return to permit Wife to use Husband 1's deceased spousal unused exclusion amount. As of Husband 1's death, Wife has made no taxable gifts. Thereafter, Wife's applicable exclusion amount is $7 million (her $5 million basic exclusion amount plus $2 million deceased spousal unused exclusion amount from Husband 1), which she may use for lifetime gifts or for transfers at death."

In the Joint Committee example, it is pretty obvious that the relatively wealthy surviving spouse should hire a lawyer to prepare a federal estate tax return for her deceased husband. At a 35% tax rate, the unused $2 million dollar exemption could someday be worth $700,000 to her heirs.

But doesn't this same logic hold true in the situation of a married couple with a much more modest net worth? Who knows what the future holds for the surviving spouse.

Assume that you are the lawyer meeting with a surviving spouse soon after the death of her husband. The deceased had an "I love you" estate plan which leaves everything to his wife. The value of his estate, for federal estate tax purposes, is $400,000. There is no federal (or state) tax and there is no requirement that a federal estate tax return be filed.

But there is a $5 million dollar unused exemption that can be passed on to the surviving spouse -- IF your client is willing to go to the hassle and expense of having an estate tax return prepared and filed. As the lawyer, how can you not suggest the filing of estate return to calculate the unused exclusion and elect to pass it on? How can you guarantee that the unused exclusion will not someday be incredibly valuable to your client's children or other heirs? At 35% tax rate, an unused $5 million exclusion could someday be worth as much as $1.75 million dollars.

Note that the more modest the estate of the deceased spouse, the more potentially valuable the unused exemption.

Also consider that surviving spouses can acquire unanticipated wealth as a result of fluctuating real estate values as an example.

As a lawyer, I don't want to find myself sitting across the table from my client's children someday trying to explain why a million dollars in avoidable federal estate taxes is due because mom didn't file an estate tax return when dad died. I'm not sure I would feel that much better even if I had some kind of a wavier signed by mom.

So, it seems to me that the portability provision in Title III of the new Tax Relief Act may be the proverbial wolf in sheep's clothing. It may create a lot of additional work for lawyers, and expense for widowed estate administration clients of only modest net worth.

Source: Jeffrey A. Marshall, Certified Elder Law Attorney, 12/19/10.

Monday, December 20, 2010

House Sends Tax-Cut Compromise to President

A massive bipartisan tax package preventing a big New Year's Day tax hike for millions of Americans is on its way to President Obama for his signature.

The measure would extend tax cuts for families at every income level, renew jobless benefits for the long-term unemployed and enact a new one-year cut in Social Security taxes that would benefit nearly every worker who earns a wage.

In a remarkable show of bipartisanship, the House gave final approval to the measure just before midnight Thursday, overcoming an attempt by rebellious Democrats who wanted to impose a higher estate tax than the one Obama agreed to.

The vote was 277-148, with each party contributing an almost identical number of votes in favor (the Democrats, 139 and the Republicans, 138). Opposed were 112 Democrats and 36 Republicans.

NBC News reported that Obama was set to sign the bill and make a statement on Friday afternoon.

In a rare reach across party lines, Obama negotiated the $858 billion package with Senate Republicans. The White House then spent the past 10 days persuading congressional Democrats to go along, providing a possible blueprint for the next two years, when Republicans will control the House and hold more seats in the Senate.

"There probably is nobody on this floor who likes this bill," said House Majority Leader Steny Hoyer, D-Md. "The judgment is, is it better than doing nothing? Some of the business groups believe it will help. I hope they're right."

'Good for Growth'
Sweeping tax cuts enacted when George W. Bush was president are scheduled to expire Jan. 1 -- a little more than two weeks away. The bill extends them for two years, placing the issue squarely in the middle of the next presidential election, in 2012.

The extended tax cuts include lower rates for the rich, the middle class and the working poor, a $1,000-per-child tax credit, tax breaks for college students and lower taxes on capital gains and dividends. The bill also extends through 2011, a series of business tax breaks designed to encourage investment that expired at the end of 2009.

Workers' Social Security taxes would be cut by nearly a third, going from 6.2 percent to 4.2 percent, for 2011. A worker making $50,000 in wages would save $1,000; one making $100,000 would save $2,000.

"This legislation is good for growth, good for jobs, good for working and middle class families, and good for businesses looking to invest and expand their work force," said Treasury Secretary Timothy Geithner.

Some Democrats complained that the package is too generous to the wealthy; Republicans complained that it doesn't make all the tax cuts permanent.

Obama talks tax cuts, business investment
Rep. Ginny Brown-Waite, R-Fla., called it "a bipartisan moment of clarity."

The bill's cost, $858 billion, would be added to the deficit, a sore spot among budget hawks in both parties.

"I know that we are going to borrow every nickel in this bill," Hoyer lamented.

At the insistence of Republicans, the plan includes an estate tax that would allow the first $10 million of a couple's estate to pass to heirs without taxation. The balance would be subject to a 35 percent tax rate.

Many House Democrats wanted a higher estate tax, one that would allow couples to pass only $7 million tax-free, taxing anything above that amount at a 45 percent rate. They argued that the higher estate tax would affect only 6,600 of the wealthiest estates in 2011 and would save $23 billion over two years.

House Speaker Nancy Pelosi, D-Calif., called the estate tax the "most egregious provision" in the bill and held a vote that would have imposed the higher estate tax. It failed, 194 - 233.

No Pelosi vote
On the bill's final vote, House Speaker Nancy Pelosi, D-Calif., did not vote; House GOP leader John Boehner, R-Ohio, and Majority Leader Steny Hoyer, D-Md., voted for the bill, and Majority Whip James Clyburn, D-SC, voted against the bill, NBC News reported.

Boehner, after the vote, called the bill's passage "critically important."

"Stopping all the tax hikes is a good first step in our efforts to reduce the uncertainty family-owned small businesses are facing, but much more needs to be done, including cutting spending, permanently eliminating the threat of job-killing tax hikes, and repealing the job-killing health care law," Boehner, House speaker-designate, said in a prepared statement.

House Republicans who will move into powerful posts when the GOP takes control in January urged passage of the bill.

Rep. Eric Cantor of Virginia, in line to become majority leader, said the measure, while not perfect, marked a "first step" toward economic recovery.

Largely marginalized in the negotiations leading to the bill, Democrats emphasized their unhappiness with Obama.

"We stand today with only one choice: Pay the ransom now or pay more ransom later," said Rep. Brad Sherman of California. "This is not a place Democrats want to be. But, ultimately, it is better to pay the ransom today than to watch the president pay even more, and I think he'd be willing to pay a bit more next month."

Source: NBC News and The Associated Press contibuting to msnbc.com, 12/17/10.