Legacy Blog

Repeal of the Estate Tax and Charitable Giving

2010-01-27T14:24:07Z

The repeal of the estate tax for the year 2010 will have a huge effect on the manner and amount of charitable giving --- or will it?

One of the issues raised by the current estate tax situation is the effect it will have on charitable bequests. From the inception of the law which gradually raised the estate tax exemption and lowered the tax rate, there has been much speculation about its impact on charitable giving. A July, 2004, Report from the Congressional Budget Office estimates, "because repealing the estate tax reduces the incentive to contribute for all decedents who would have faced it, that step would have induced a decrease in charitable bequests of 16 percent to 28 percent."

In 2003, the Urban-Brookings Tax Policy Center predicted that the estate tax repeal would reduce charitable bequests by between 22 and 37 percent. In an article entitled, "Tax Policy Issues and Options," the Center further reasoned "outright repeal could also change behavior. It would convey an explicit message that charitable giving at death is no longer encouraged. It would remove some of the need to do tax planning prior to death. The elimination of the charitable deduction would eliminate a major selling point for charities."

Since the estate tax currently generates an estimated $25 billion per year in revenue, these reductions, if accurate, would have a significant impact. But the question I pose is: will the repeal really have an impact?

Personally, I believe with the way things stand now, that the estate tax repeal will not be a very large factor in charitable bequests for the following reasons:

1. A person's expected estate depends on how he or she anticipates assets to grow over time. I believe the present economic condition will have as much, if not more, effect on charitable bequests than the estate tax repeal.

2. Because the repeal is currently only for one year and there is concern about a retroactive reinstatement, most people will wait for stability in the law before changing their estate plans.

3. How much does tax savings play in charitable giving? Many gifts and bequests are made for altruistic reasons that have nothing to do with taxes. Many people not subject to estate taxes give generously during their lifetimes and out of their estates.

However, if the repeal is made permanent (a move I don't expect to take place) there will likely be a shift toward reduced charitable bequests, as those that give primarily for tax benefits will adjust their planning.

The Estate Tax Planning Dilemma

2010-01-18T13:33:22Z

The failure of Congress to pass legislation to resolve the estate tax issue has put estate planning professionals and their clients in a tenuous position.

In 2001, Congress passed and President Bush signed a law that gradually raised the estate tax exemption from $600,000 to $3.5 million in 2009. The law further provided a one year repeal of the estate tax in 2010 with its scheduled return in 2011 at a higher rate and with a lower exemption amount ($1 million). Most anticipated that Congress would pass legislation extending the 2009 status or even permanently eliminating the estate tax.

Despite a period of 8 years to act, Congress has failed to do anything to stabilize the situation. Apparently, the Republican controlled legislature of the first 6 years of this period, despite bold talk of permanent repeal, lost its nerve. And today's Congress, which many have collectively diagnosed with a severe case of ADHD, is too busy with health care, Cap and Trade, executive compensation and other issues to give this issue much thought.

This leaves estate planners in quite a dilemma with respect to advising their clients. The current situation calls for major revisions in many estate plans, with more changes to come depending on how Congress acts, if it acts at all. This is sure to keep us estate planning professionals busy, but it creates excess expense and uncertainty for our clients.

There is rampant speculation as to what Congress will do, ranging from doing nothing (and allowing the current law to remain) to extending the 2009 provisions indefinitely to permanently repealing the estate tax. There is also the possibility of reinstating the estate tax in 2010 retroactively as proposed by Senate Finance Committee Chairman, Max Baucus. This last possibility will surely invite legal challenges to its constitutionality.

From an estate planning perspective, even the temporary repeal of the estate tax can have severe unintended consequences. Married couples with significant estates have set up estate plans containing provisions creating "Credit Shelter Trusts" which allow them to maximize their estate tax exemptions.

When the first spouse dies, assets with a value equal to the current exemption amount are put into the Credit Shelter Trust thereby preserving that spouse's exemption. The remainder of his estate passes to the surviving spouse free of estate taxes due to the unlimited marital deduction. The assets transferred to the Credit Shelter Trust are included in the deceased spouse's estate for federal estate tax purposes. As a result the surviving spouse is given limited access to such assets.

The language of most wills and trusts provides the amount passing to the Credit Shelter Trust will be equal to the current federal estate tax exemption. Since the entire estate will be exempt from federal estate tax, one interpretation of the trust language may require all assets to be placed in the Credit Shelter Trust thus leaving the surviving spouse with no assets from the deceased spouse's estate. Another interpretation may result in no assets being transferred into the Credit Shelter Trust. In this case all assets will pass to the surviving spouse. If the estate tax returns in 2011 with a $1 million exemption, then the deceased spouse's exemption will not have been preserved leading to $550,000 in additional estate taxes.

Of course, the taxpayer can have his or her estate planning attorney revise his or her documents to meet this scenario. So a person dying in 2010 can take full advantage of the temporary repeal - unless, of course, Congress changes the law retroactively.

And our clients already complain that their documents are too complicated and full of legaleze.

Death (and Resurrection) of the Death Tax

2010-01-11T16:26:27Z

Ding Dong the estate tax is dead! But don't celebrate yet, Dorothy. This development is actually making things worse. Much worse.

In December, the U.S. House of Representatives voted to extend the then existing estate tax law indefinitely. This would mean that, if the Senate concurred and the President signed the bill into law, 2009's estate tax rates - 45 percent for individual's estates over $3.5 million and $7 million for married couples - would become permanent.

However, the Senate failed to act prior to the end of the year. As a result, the estate tax legislation that was passed during the early years of the Bush Administration continues in force. This is the law that over the years increased the size of a person's estate that would not be subject to the estate tax from $600,000 to $3.5 million. By 2009, if your estate did not exceed $3.5 million, you would not pay any estate tax.

Also, pursuant to this law, the estate tax completely disappears in 2010, only to return with a vengeance in 2011. Next year the $3.5 million exemption level drops to $1 million, thereby exposing millions more of families to this taxation. The estate tax rate also increases from 45 percent to 55 percent.

This, due to the inaction by the Senate, is where we are today. No estate tax this year, a draconian confiscation of family assets in 2011. For a person dying in 2009 with an estate of $10 million, the estate tax would be $2.925 million. If he dies in 2010, there would be no tax. If he can hang on until 2011, Uncle Sam would claim $4.95 million dollars.

IT GETS WORSE!!!

Also included in the Bush era legislation was a little provision that in 2010 ended the "step up in cost basis" for determining capital gains. For example, if years ago your grandfather purchased stock in the company that employed him for $2 per share and now the stock is worth $100 per share, and he sold the stock today, he would be liable for capital gains tax on the $98 gain for each share sold. If he was in the top tax bracket, that would be $14.70 for each share sold.

However, if prior to selling the stock, Grandpa died in 2009 and left his stock to you, your tax basis would be the value of the share at the date of his death - the "stepped-up" basis. If the value was $100 at the date of his death and you sold it for $100, there would be no increase in value from your stepped-up basis and thus no capital gains tax.

In 2010, according to the law, you would inherit Grandpa's $2 cost basis along with the stock and be subject to the $14.70 capital gains tax when you sold the stock. As you can see, this, along with talk from the Obama administration about raising the capital gains tax rate, would be a direct assault on America's middle class.

To be fair in my analysis, the law gives each taxpayer $1.3 million of step-up at death. This sounds like a lot, but when you start to look at the value of business assets and real estate a person has accumulated during her lifetime, it becomes apparent that this provision gives her family very little protection. It also imposes a massive record keeping burden over decades to track the step-up. A similar approach was tried in the mid 1970's and almost immediately repealed.

A SMALL BUSINESS NIGHTMARE

By way of illustration, let's look at the case of a single mother of two, who in the mid 1970's started a modest retail business to help pay the bills. She bought a small shop out of which she operated the business and struggled for years to make the mortgage payments, both on her shop and her home. She finally reached a modest level of success in her business and upon her death in 2011, left it all to her two daughters.

The daughters had helped their mother in the business and wanted to continue its legacy. The value of the mother's estate - which consisted mainly of the business building, the business assets and inventory and the family home, was $2 million. The business building had increased in value from $100,000 to $900,000 and the home from $100,000 to $500,000. The business itself had substantially increased in value and the rest of her estate comprised an IRA and some modest investments.

The daughters looked at their situation. The estate tax burden would be $550,000. There was not enough cash and liquid assets in the estate to pay it. The house would have to be sold if they wanted to continue the business. Assuming they could get full value, they would be subject to $60,000 in capital gains tax. The total tax would be $610,000 on a $2 million dollar estate.

As a result of the law, this middle class family could not continue to own and operate the family business that had become so much of their lives and had been the dream that their mother had fought and slaved to make a reality. Taxes would crush her legacy.

It was always assumed that Congress would extend the $3.5 million estate tax exemption or even permanently eliminate the estate tax. The Republican controlled Congress prior to 2008 apparently didn't have the guts to do it and now, with Democrats controlling both Congress and the White House, and the massive government deficit, who knows what direction it will head.

What we know to be sure is, if this law remains as it is, it will devastate small family businesses, cripple the middle class and create more dependence on government. None of this is worth celebrating.

Finally, An Answer on Estate Taxes?

2009-12-04T11:32:55Z

After almost a year of speculation, we see the first indication of what Congress will do with the estate tax.

As the law stands now, the estate tax is levied against estates exceeding a value of $3.5 million for individuals and $7 million for married couples at a rate of 45 percent. The current law calls for the estate tax to disappear at the end of this year. However, in 2011, it would return with a vengeance. Estates exceeding $1 million would be taxed at a 55% rate. That means that a $5 million dollar estate would be subject to $675,000 in estate taxes if the taxpayer dies this year, no estate taxes if he dies next year and $2 million in estate taxes if he dies in 2011 or later.

This scenario has led to great speculation as to the fate of the tax. Originally, it was believed that Congress and the Bush administration would make the elimination of the estate tax permanent. But when the Democrats took control of both houses of Congress and the White House, the thought was that they would not allow the estate tax to expire in 2010. The new question was: How much will the tax rate be and at what level would it kick in?

Now Congress has taken the first step in clarifying what will happen with the estate tax. The House of Representatives voted Thursday to extend the current estate tax indefinitely. If this measure is adopted by the Senate and signed into law by the President, it would make this year's rates permanent - 45% tax rate for estates over $3.5 million for individuals and $7 million for married couples.

Because of the immense attention being given to health care legislation, it is unlikely that the Senate will pass a bill before December 31 and the expiration of the estate tax. It is widely believed that they will vote to extend the current tax for a year in order to give them time to take up and fully debate the issue in 2010.

For people with estates exceeding $1 million dollars, this would mean a delay of another year before they can effectively adjust their estate and legacy planning.

Strange Legacies

2009-10-15T18:14:41Z

"Being of sound mind, I spent it all." - Anonymous

This site is dedicated to helping you create a legacy for those you leave behind. There are many ways to seek immortality. In this post we'll look at some of the stranger ones.

Some people don't want to share with those they leave behind; they are perfectly content to take it with them. Sandra Ilene West, a rich Texas widow, requested that she be buried in her Corvette, sitting behind the steering wheel, in her negligee. Despite her will being challenged, Mrs. West eventually got her way.

A Patron of the Arts. In 1955, Juan Potomachi left over $50,000 to the Teatro Dramatico in Buenos Aires, Argentina, on the condition that, in their production of Hamlet, the part of Yorick's skull . . . you guessed it . . . would be played by Juan's skull.

To Boldly Go Where No Man Has Gone Before. Gene Roddenberry, the creator of the original Star Trek television series, arranged for his ashes to flown into space and shot out as the satellite orbited the earth.

Creating a Legacy of Making Yourself Useful. In 1983, Tony Gribble's Will requested that his ashes be put in an egg timer so he could continue to be of some use.

Marvel Comics comic book writer, Mark Gruenwald, was the long-time writer of Captain America. When he died in 1996, his ashes were mixed with ink and used to print a comic book in accordance with the provisions of his Will.

A Finnish business man left 780 shares of a rubber boot company to the residents of a nursing home in Finland. That company later became Nokia, which makes cell phones, making all the nursing home residents millionaires.

Am I Really Gone? In 1972, Vampire afficionado, Harold West, left explicit instructions to his doctor to "drive a steel stake through my heart to make sure I am properly dead."

Harry Houdini left a secret code for his wife, so that when he came back to visit her, she would know it was him and not an imposter. Each Halloween, for ten years after his death, she held a seance. No one knows whether she was ever able to use the secret code.

Earl Allen Thurber was buried in 1929 with a phone in his hand. He was terrified of being buried alive. He left instructions with the mausoleum that, if he hadn't called in three days, the phone was to be disconnected.

John Bowman, from Vermont, died in 1891. He left a $50,000 trust fund to preserve his 21-room mansion and mausoleum. He was so sure that he, his wife and their two daughters would return from the grave that he ordered servants to prepare and serve dinner every night – just in case the Bowmans had a touch of hunger when they made their grand appearance. They served dinner every night until 1950. That’s when the money ran out.

Marital Disharmony. Samuel Bratt's wife hated his smoking and wouldn't let him smoke his favorite cigars at home. When he died in 1960, he left her the sum of 330,000 Pounds, on the condition that she smoke five cigars per day.

The Last Will of an Irishman bluntly stated, "To my wife, I leave her lover, and the knowledge that I was not the fool she thought me."

Heinrich Heine left his entire estate to his wife. However, she would only receive it if she remarried "so there will be at least one man to regret my death."

On a contrasting note, when Jack Benny died in 1974, he left a heartfelt legacy to his wife. The day after Benny’s funeral, a florist delivered a single long-stemmed red rose to her. She received another the next day. And the day after that and the day after that. In his Will, Jack set aside money to have a rose delivered to her every day for the rest of her life. She lived another 9 years with that daily reminder of her husband’s love.

Donor Advised Funds

2009-10-12T19:51:14Z

An extremely popular and efficient means of creating a legacy to your community is through the use of Donor Advised Funds. A Donor Advised Fund is a charitable fund set up through a Community Foundation. It is an alternative to a Family Foundation for those who do not want to take on the responsibility of administration, potential liability, record keeping and lack of privacy. Since Donor Advised Funds are set up and administered through Community Foundations, a good starting place for this post would be a definition and discussion of Community Foundations.

What is a Community Foundation?

A Community Foundation is a public charity organized under the Internal Revenue Code. They are generally set up to serve a specific geographical area. Community Foundations provide grants to a number of different charities in its service area. Instead of concentrating on one charitable cause, a Community Foundation dedicates itself to serving the wide variety of needs of its community and donors.

Community Foundations are set up as endowments and the grants given by it come solely from the income of those endowments. Many Community Foundations limit the amount of grants they can give each year to a specific percentage of the endowment principal. In this way, the endowment remains stable during times of market volatility.

In setting up a Donor Advised Fund, you would donate a sum of money or property to the Community Foundation as a permanently endowed fund. Each year the income from your fund would be available to contribute to charitable organizations or causes in the community. You and your family are allowed to direct or advise how the grants are to be distributed each year.

Comparison of Donor Advised Funds with Family Foundations.

1. Donor Control. Both Family Foundations and Donor Advised Funds provide the donor with various levels of control in selecting grant recipients. With a Donor Advised Fund, you and your family, as the donor, can make advisory recommendations to the Community Foundation who has the ultimate authority to select the recipients.

You have complete control in selecting grant recipients (subject, of course, to IRS requirements) if you create a Family Foundation. Founders can create their own board, have a wide choice of investments and absolute discretion in recipients. Family Foundations allow you the full range of flexibility and control.

2. Set Up Costs. Donor Advised Funds are much less expensive to create than Family Foundations. Family Foundations require the formation of an entity, either a nonprofit corporation or a trust, with all of the appropriate legal fees and filing costs. The Donor Advised Fund is created within the Community Foundation and, in most cases, can be set up with a simple agreement.

3. Record Keeping and Administration. Management, record keeping and tax reporting for a Donor Advised Fund is provided by the Community Foundation usually at a low annual fee (1% of less of the fund balance). The board of a Family Foundation has the responsibility of administering the Family Foundation, although it can retain outside management services.

4. Charitable Tax Deductions. With a Donor Advised Fund, cash contributions are deductible at the full rate (up to 50% of the donor adjusted gross income "AGI"). Family Foundations’ tax deductions are limited to up to 30% of the AGI. Contributions to Donor Advised Funds of marketable securities and other property such as real estate receive a charitable tax deduction for the full market value. With Family Foundations, the deduction for marketable securities is based on the full market value. However, for other appreciated property, like real estate, the deduction is limited to the donor’s cost basis in the property.

5. Excise Taxes. Family Foundations are required to pay a 2% annual excise tax on its net investment income. Donor Advised Funds are not subject to this tax.

For persons with smaller estates or those that do not require the control over the grant making process, a Donor Advised Fund is an attractive alternative.

Donor Advised Funds provide much more privacy. Because of the need for tax filings and reporting with the Family Foundation, it is easier for people to find out the identity of donors and how much money they contribute. An individual’s contribution amount to a Donor Advised Fund is not publicly available.

Leaving a Legacy to Your Community

2009-10-02T16:28:46Z

Many people feel compelled to give back to their community. After all, what better way is there to leave your legacy than by helping others? A plan of charitable giving is the action behind the words of the Legacy Statement.

There are causes near and dear to each of our hearts that we have a desire to support. Unfortunately, many people don’t know how to set up a charitable plan. Even more unfortunate, many don’t believe they have the resources to contribute to charity.

There are many different ways to set up a charitable program. No matter what the size of your estate, you can create a vehicle that will allow you to give to the cause of your choice, on your terms, for generations to come. Even smaller estates can create a charitable legacy that will positively impact lives. Did you know that you can reduce and eliminate estate taxes through charitable giving? That it's possible to give a large portion of your estate to charity and still have your heirs receive a larger inheritance than if you had not given?

If you have a large estate, you are going to be a philanthropist whether you plan for it or not. If you make no charitable plan of your own, your default charity will be the United States Treasury.

Estate taxes are levied at the federal and state levels and confiscate a significant percentage of all estates that exceed the maximum estate tax credit. Some high net worth individuals have engaged in estate planning to be able to pass the maximum amount allowed by law to their heirs. But in a lot of cases, part of the estate is still subject to estate taxes. For these taxpayers, their legacy is contributing to the programs and operations of the government.

Think about it. Do you believe the government is doing a good job of applying our tax money? Or do you think you can make better decisions on how that money is used?

What a lot of people don’t know is that their charity doesn’t have to be the government. You can control that part of your estate that is earmarked to go to the government in the form of estate taxes. How much of an impact do you think your estate tax contribution will make to society? And what will it support? Will it be a program or cause that you feel strongly about, or will it be used in a way that does not represent your values? Remember, sharing your legacy is about passing on your values.

Fortunately, the government has provided us with certain credits and deductions to apply against our estate tax liability. The most powerful of these is the charitable deduction. Any portion of your estate that you contribute to a qualified charity is not counted as a portion of your estate that is subject to estate taxation. In addition, charitable contributions provide deductions that will reduce your income tax liability. In future posts I will show you how the charitable deduction can be used to actually increase the size of your estate.

A Brilliant Discussion

2009-09-08T20:14:02Z

This afternoon, I was fortunate to be able to record a discussion I had with Simon T. Bailey about his book, Release Your Brilliance, and leaving a legacy.

For those unfamiliar with Simon, he is a best selling author, world renowned speaker and, in his own words, a "Catalyst for Brilliance." After building a successful career at Hyatt Hotels, Walt Disney World Resort, and the Disney Institute, Simon stepped away to create the Brilliance Institute. The Brilliance Institute is an organization dedicated to building the world's most valuable resource -- its people.

He is sought out by Fortune 500 companies and individuals alike to inspire companies to clear obstacles to brilliance in their cultures, processes and people. Some of his notable clients are Microsoft, Oracle, Verizon and State Farm Insurance. Simon was named Central Florida's "Man of the Year" in 2000.

Release Your Brilliance is a guide that emphasizes to people "what they can do" and not the things they can't do which keeps them from achieving their potential. According to Simon we are all born with brilliance; however, as we get older, our lives and the world cover and bury that brilliance. Simon's book is a strategy for uncovering and releasing the brilliance we all have.

In our discussion, Simon spoke about the ability we have to influence others and to help them release their own brilliance. He related a story about his father's inability to tell him that he loved him. That the day when his father first told him he loved him and believed in him, it started a chain reaction in his family, from him telling his own son, to his brother expressing his love. It is amazing to see how the smallest actions can have the biggest impact on others and create a legacy that spans generations.

Keep an eye on this blog in the future to find out how you can acquire a copy of our discussion. In the meantime, you won't find a better way to improve your outlook on life than to read Release Your Brilliance. It is available at Amazon.com and www.SimonTBailey.com.

Creating a Legacy Statement

2009-09-03T15:42:16Z

Many of us have, at times in our lives, struggled to achieve success and find meaning to our existence. For some of us, that struggle continued for years while we learned through trial and error lessons that shaped our outlook and made us the persons that we are today.

Was your life experience a journey that led you to this point in time? Or did you one day have an epiphany that changed everything? Regardless of the manner in which you got here, the story of your life holds lessons and values for your loved ones.

As an estate planning attorney, I have had the experience of listening to clients as they strive to create a plan to distribute their worldly possessions after they are gone. Invariably, this conversation turns to their children. How they were when they were young. What kind of persons they have turned out to be.

Many times, these thoughts guide my clients in deciding what each child will receive. Instead of sending a message through the distribution of assets, wouldn’t it be fitting if they could put their feelings in a different type of will?

That different type of will has been referred to as an “ethical will” or as we will call it, a Legacy Statement.

The ethical will is an ancient tradition which many trace back to the Biblical story of Jacob, who before his death conferred a personal blessing on each of his twelve children. The practice reached its peak in the Middle Ages and has undergone a resurgence lately.

A Legacy Statement is a publication of a message you wish to give to those you leave behind. It can take the form of many different media. While most Legacy Statements are in writing, an ever-increasing number are being delivered by audio or video recordings.

It is important to realize that a Legacy Statement is not a legal document. It may express your wishes and desires, but it should not be intended as a legally binding instrument.

A Legacy Statement allows you to deliver a personal story based on a theme you select. Legacy Statements may be long journals or brief letters. Each is as unique as its author, but most have certain elements in common.

1. A Target Audience. This is the object of your message and lesson. The person or persons to whom you are directing the Legacy Statement. It may be your spouse, your children, your friends, your community or anyone you intend to be impacted by your statement.

2. A Message. The message is the expression of the purpose for writing the Legacy Statement. You will need to decide the purpose of your Legacy Statement. Some examples of the reasons people write Legacy Statements are:

• To impart advice to those who follow you.

• To serve as a love letter to those who mean so much to you.

• To introduce yourself to future generations who will never have the honor of meeting you in person.

• To emphasize what has been important to you and has been a profound influence in your life.

• To tell your personal story; your hopes, your dreams, your disappointments. It may be a narrative of past successes and failures, an accounting of your life. Some writers use the occasion to speculate how they would do things differently if they had the chance to “do it all over again.”

3. A Lesson. Out of the message comes a directive or lesson that you may wish to impart. You can use your life experiences to create a background for your statement of the moral and ethical principles you implore your heirs to follow.

Andre Agassi Continues His Legacy

2009-09-01T16:29:17Z

For many, a 21 year tennis career, with 68 career titles, including championships at every Grand Slam event, would be legacy enough. Not for Andre Agassi. Agassi has taken the fame and financial benefits of his stellar tennis career and leveraged it into legacy of philanthropy.

His most recent project, the Andre Agassi College Preparatory Academy, continues a history of using his talents and resources to help children. In 1994, Agassi founded the Andre Agassi Foundation which has been responsible for sponsoring a Boys and Girls Club, funding a facility that accomodates developmentally delayed or handicapped children and children quarantined for infectious diseases and helping to build classrooms for Child Haven, a residential facility for abused and neglected children.

In 1995, he earned the Association of Tennis Professional's Arthur Ashe Humanitarian Award for his help with disadvantaged children.

The Academy , which teaches grades K-12, opened in 2001 and had its first high school graduation two months ago. According to Agassi, all 34 graduates are headed to college.

From an article in a recent New York Times edition, Agassi says he considers the school a laboratory of sorts, to see if his ideas for streamlining and improving education can have an effect on the "children society is quickest to write off." It operates in the 5th largest school district in the country -- Las Vegas's Clark County -- and in a state near the bottom nationally in sending students to college. Agassi hopes to boost graduating classes to more than 50 students each year, and if his academy succeeds, he hopes its example will become part of a national effort to improve public schools.

The tenacity and determination that were the hallmarks of his tennis career continue in his quest to make a lasting impact on others.