Would you ever turn down an inheritance?

Your first reaction might be “Of course not!” But don’t speak too soon. Most estate plans are created at least in part to protect heirs (generally spouses and children) from the sometimes devastating blow of estate taxes; but with the estate tax in a confusing state of flux this year some of these plans won’t work as their creators intended—and heirs may end up looking for a way to protect themselves against the unintended consequences of well-intentioned estate plans.

This article in the New York Times explains what it means if you disclaim (or turn down) an inheritance, and when you may want to employ this tactic.

“Historically, lawyers have recommended disclaimers to repair estate planning oversights that bring negative tax consequences — as when parents left money to already affluent adult children. In such a case, the children could disclaim, so the inheritance would go their own children instead, rather than facing the possibility that this money might be taxed in their own estates.”

The article goes on to explain why some people might consider using this strategy this year, when—due to the expiration of the estate tax—“a formula clause could wind up allocating all the money to one [heir] or the other, rather than dividing it between the two.”

Although this is an interesting solution to be considered in some cases, there are no easy answers to the question of what to do when you are the beneficiary of an estate that has taken an unexpected turn. If you have any questions whatsoever about an inheritance—or about your own estate plan—call your estate planning attorney for help.

The recent repeal of the estate tax is having unintended consequences for responsible husbands and wives who already had a will or trust in place to protect their spouse and family—instead of protecting them, that existing will could now end up leaving surviving spouses with nothing.  Jonnelle Marte at the Wall Street Journal has this to say:

“It’s a common practice for people to use formulas in their wills designed to send the maximum amount of assets not subject to the estate tax into a trust, often for their children. The remaining assets are usually left to the surviving spouse. But this year, there’s no limit on the assets people can pass to their heirs without being subject to federal estate tax. So all of the assets could go into a trust and the surviving spouse would get zero.”

Does this mean you’ll have to get your will or trust updated every year?  No. But it does mean that you’ll want to get your will or trust reviewed by an estate planning attorney this year. A review of your estate planning documents is a quick and easy process, especially if you don’t have any other significant changes to make.  One thing is for sure, the small amount of time you spend making sure your documents are current is well worth the protection and benefit your spouse and family will receive from it.

Among the many changes in tax law to go into effect in 2010 was the change in cost basis for inherited assets. Previously, all inherited assets were “stepped-up” from their original value at date of purchase to their fair market value at date of death. In this way, if inherited assets were sold shortly after death, no capital gains tax was owed. However, in 2010 inherited assets do not receive this automatic “step-up”; instead they will be valued at the lesser of the decedent’s basis or the fair market value as of date of death. The result is that for decedents dying in 2010, the decedent’s tax basis and the fair market value as of date of death will have to be determined for every asset. As you can imagine, this will cause paperwork nightmares for heirs.

What we suggest is making a list of your assets and their values and tax basis information now, while you are still alive and your memory is fresh. This is not a list that has to be shared with anybody until after your death, but the mere existence of your list of assets will save your family and heirs hours of headaches (and heartache) later on.

If the thought of taking the time and energy to sort through files and records to gather this information makes you want to run for the hills, imagine how your heirs will feel!  To ease the burden, try making your list one asset at a time, over the course of many days. However you choose to create your list, you can be sure your heirs will thank you.

(Note: There is an exemption amount of $1.3 million of gains from this carry-over basis rule, and another $3 million exemption applying to assets inherited from a spouse.)

Now that it’s 2010 and congress has failed to take action regarding the repeal of the estate tax, we see a lot of articles discussing whether the lack of taxation for a year is a good or bad thing; sometimes these articles go even further, arguing whether estate tax in general is a good or bad thing.  These are all interesting discussions, but our firm is more concerned with how your estate plan will hold up this year when it was likely designed to weather very different circumstances.

To this end, we have found that CBS’s Money Watch.com has published a very useful article about what the lack of estate tax in 2010 could mean for you and your family.  The entire article is educational, but if you scroll about 1/3 of the way down the page you get to the crux of the article, a section titled “Steps to Take Now.” This section provides you with practical advice on what you can do, and what in your estate plan may need to change in order to keep up with the changing times and taxes:

• Keep good records
• Have an attorney review the “formula clauses” in your estate plan
• Be aware of the tax laws for your state of residence
• Give your estate plan a “check-up” as soon as possible!

As you and your attorney are reviewing your estate plan, keep in mind that the estate tax situation is likely to change again in 2011 (and may even change before 2011, effective retroactively), and try to plan accordingly.  As Money Watch author Deborah Jacobs writes, “Whatever might be happening in Washington, no one should postpone the necessary steps. Just because Congress is inefficient and disorganized doesn’t mean that you must follow suit.”

It’s the beginning of a New Year, a time of new beginnings when many people set goals for themselves and make their New Year’s resolutions; but according to Wikipedia, in spite of all this optimism and confidence, only 12% of people who make resolutions will actually achieve their goals!

Why is it that so many people let their goals fall to the wayside?  What happens to all that New Year’s exuberance and optimism? Well according to Jonah Lehrer of The Wall Street Journal it’s all about biology. Lehrer says that the area of the brain responsible for willpower—the prefrontal cortex—is like any other muscle: it must be worked and strengthened if you expect it to perform feats of strength.

If this is true, then it makes sense that the success of your New Year’s Resolutions would depend in large part in how you go about setting them. Just as you can’t become a bodybuilder by saying “this week I’m going to bench press 200 pounds,” you can’t become a model of health and beauty by saying “this month I’m going to lose 50 pounds.” Rather, large goals are achieved by setting smaller, measurable milestones: “This week I will have fruit as my afternoon snack instead of potato chips.”

So how does this apply to our blog? Achieving financial security, a strong retirement plan, or a successful estate plan is no different than losing weight or quitting your smoking habit: it comes easiest when you take it one step at a time—and when you have a little bit of help. Instead of making a vague goal such as “this is the year I’ll get all my legal issues taken care of;” take smaller, more measurable steps such as “this month I will call and make an appointment with the attorney.”

A smaller goal such as the one mentioned above not only means less pressure at the outset, it also gives you an ally, someone who can help you along the way; and that’s exactly what our firm hopes to be.

Happy 2010!

The question on everybody’s minds the past few months has been “what legislative action will be taken regarding the expiration of the estate tax in 2010?” Well, Congress has adjourned for the year and the answer to the question is… Nothing.

With Congress home for the holidays and no action taken, the estate tax is still slated to disappear on January 1st, reverting in 2011 to the old rate of 55 percent for estates worth more than $1 million. But before you get too excited, take a moment to read what this article in the New York Times has to say:

“Jere Doyle, wealth strategist at Bank of New York Mellon, said the wealthy should not get their hopes up for an end to the estate tax. He pointed out that an estate did not have to submit its first tax bill until nine months after a person’s death. The Senate could wait, then, until the summer to decide on the estate tax and make it retroactive to the beginning of the year. This would wreak havoc on estate planning. Even if the Senate acted early in the coming year, it could still lead to a flurry of legal challenges on the constitutionality of reinstating a tax that had disappeared.”

It turns out the Congress’s failure to act has not made it easier for you to pass your wealth onto your children, it has only made things more uncertain than ever. The best action you can take during this “in-between time” is to have your estate plan reviewed by a professional to ensure that you’ve taken the right steps to prepare for whatever the future may bring; and most importantly, do not submit the first tax bill for a deceased’s estate in 2010 without talking to your estate planning attorney first!

Along with the rest of the nation, you are probably watching the progress of various versions of the health care legislation making their way (or not making their way) through Congress. Today’s New York Times points out that the current bill contains a “major new federal insurance program for long-term care” — although many are not aware of it.

Should it become law, the program might have a significant effect on a problem that is already bad, and promises to get worse. That is, how are we to care for members of our society who can no longer care for themselves, but might live for years? To give just one prominent example, former President Ronald Reagan revealed his Alzheimer’s diagnosis in 1994, but did not pass away until ten years later.

Nursing home costs have the potential to bankrupt families that are not prepared with legal planning. Drafted by the late Sen. Edward M. Kennedy several years ago, this federal insurance program might be an important tool in addressing the problem, but critics say it will be unsustainable. Instead of families going bankrupt paying for nursing home care, it will be the government, in their view.  Read the entire article here.

If you are a Caucasian woman, aged 35 or older, possibly married, definitely working at least part-time—then there is a good chance that you are now or will soon be serving as a caregiver for an aging parent or relative; at least, this is according to the new report released by the National Alliance for Caregiving, AARP, and MetLife.

The entire report, entitled “Caregiving in the U.S., A Focused Look at Those Caring for Someone Aged 50 or Older” is 73 pages long, but you needn’t read the entire thing to get an insider’s peek at the state of caregiving today.  And the report isn’t limited to caring for an aging relative; it includes statistics on those caring for special needs children, as well as family members of any age.

Some of the more interesting statistics listed in the report are:

• 40% of Caregivers are aged 50-64.
• 63% of those receiving care are over the age of 75.
• 67% of Caregivers are women.
• 76% of Caregivers are Caucasian.
• 89% are caring for a relative (36% of the time it is the caregiver’s mother.)
• Over half of caregivers are employed while caregiving; and…
• Caregivers provide an average of 19 hours of caregiving per week (in addition to their regular employment.)

It is worthwhile to note that according to this study most of these caregivers are unpaid for the care they give, which makes sense if they are caring for a family member and are doing it voluntarily—but a full 43% said that they felt they did not have a choice to take on the role.

Our office can’t prevent you from one day needing a caregiver (or one day having to serve as a caregiver) but we can help you plan for when that day may come.  Thinking and planning ahead can keep you—and your loved ones—from ending up in a situation where you feel you have no choice.

The question on every estate planning attorney’s mind (and on the minds of our clients) is what will happen to the estate tax next year?  There is less than a month left before the estate tax expires, and although nobody expects our representatives in Washington to actually let that happen, as of yet there are no firm resolutions regarding the matter.  We are, however, getting closer. 

The House recently voted not to let the estate tax expire, but instead to let it continue indefinitely at the current rate. Unfortunately the legislation has yet to make it through the Senate, and considering the gridlock that body is experiencing over health care reform, holding our breath for a decision on the estate tax before year’s end isn’t recommended.

The issue that estate planners are most concerned about at this time is not actually what the final decision will be (although that certainly is important), but how long it will take our government representatives to reach that decision. It is generally assumed that any decision reached in 2010 regarding the estate tax will be retroactive, which means that any estates opened next year before the decision is made might at some point have to pay estate taxes retroactively. The possibility of retroactive estate taxes means that holding off on your estate planning until after the legislation has passed is not as wise a decision as you may think.

We know our lawmakers have a lot to think about as 2010 approaches, but so do you—the taxpayers.  Let us help you start the New Year off on the right foot: Making your own decisions about your estate planning, and keeping one step ahead in the game.

Why do people give so many charitable gifts in December?  The holiday spirit may not be the only thing inspiring people to give to the less fortunate this month, it may also have something to do with lowering your 2009 tax bill. If it’s taxes you’re worried about, there are a few other moves you can make after you’ve done your charitable giving. Ashlea Ebeling of Forbes has a whole list of things you can do to lower your 2009 tax bill before year’s end, we’ll mention just a few of them here:

• Fund those retirement savings accounts.  As the article above points out, you can fund your 2009 retirement accounts up until April of 2010, but if you have an employer who will match your investment it’s likely they’d like to know before the end of the year what amount they’ll be matching. If you’re self employed you’re on a tighter schedule because the deadline for setting up a solo 401(k) is December 31.
• If have plans to receive any expensive medical procedures in the near future that won’t be covered by your insurance, you may want to consider having them done before January 1^st. Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income are deductable.
• If you’re in the market for a new home, the homebuyer credit has been expanded from November 30^th to May 1^st 2010.  This credit used to be only for newcomers to the real estate market, but is now available for both new homebuyers and longtime homeowners looking to purchase a new home.
• A different—but related—course of action is making upgrades to the home you already own. Certain energy efficient improvements to your home can also get you a credit on your taxes… if you get the improvements done before the end of the year.
• One more way you may save money on your taxes this year that you won’t find mentioned in the Forbes article is to create an estate plan which includes a trust. To the extent that the legal planning services cover tax advice or regard income producing property, the fees you invest in establishing and operating a trust are deductible from your federal income taxes.

All of these are good ways to save money on your 2009 taxes, but action needs to be taken before the end of the year.  That gives you only… 24 days left to take action!