President Obama's 2013 Budget Could Impact Estate Tax Planning

On February 13, 2012, President Obama presented his 2013 Budget Proposal. His proposal has a number of provisions that impact numerous tax areas including the federal estate tax regime. Under President's proposals, over the next 10 years, the proposed estate tax changes would raise approximately $1 trillion in revenue.

I would wager many of the provisions are unlikely to become law but it is always good to see what estate tax changes might be coming:

  • Return to 2009 Federal Estate Tax Exemptions. Under the 2013 proposal, President Obama wants to turn back the clock to 2009. That would mean a federal estate tax exemption level of $3.5 million (reduced from $5.12 million in 2012). It would also decouple the gift tax exemption from estate tax exemption and provide a $1 million lifetime gift exemption (reduced from $5.12 million in 2012). A maximum forty-five percent (45%) tax rate would apply to estate, gift and generational skipping transaction (GST) taxes.
  • Portability. The 2013 proposal would retain portability of unused estate and gift tax exemption between spouses.
  • Consistency in Value for Transfer and Income Tax Purpose. Under the current system, a person inheriting an asset from a decedent receives a "step-up" in basis to the date of decedent's death for capital gains purposes. The 2013 proposal requires that the recipient of the inheritance would need to be consistent with the tax basis of the asset when reporting necessary filings to the IRS.
  • Modified Rules on Valuation Discounting. In an attempt to reduce the discounting done in interests of family controlled entities that are transferred to or for the benefit of family members, the 2013 proposal would increase the number of restrictions that are not taken into account for discounting purposes during these type of transactions. Thus, more restrictions would increase the transfer tax value of the interests above the price a willing buyer would pay.
  • Minimum Term for Grantor Retained Annuity Trusts GRATs. This type of entity has been a target before and not surprising this has come up again. The 2013 proposal would require a minimum ten-year term for any GRAT. The proposal also requires that the remainder interest have a value greater than zero when created and prohibit a decrease in the annuity during the GRAT term. As I demonstrated last month, a longer minimum period increases the risk of using these devices.
  • Limit GST Exemptions to Ninety (90) years. After a trust has been in existence for ninety (90) years, its generation-skipping tax exemption would be effectively eliminated. This would be used to combat the rise in states that have eliminated the dreaded law school property topic of the rules against perpetuities. Historically, the rules against perpetuities limits a trust's duration.
  • Revamp of Grantor Trust Tax Inclusions. In any grantor trusts, the individual that owns the trust for grantor trust proposes will have to include the trust assets in his or her gross estate for federal estate tax purposes. Further, any non-grantor who is deemed the owner of the trust and engages in a sales transaction with the trust will be subject to estate tax on the portion of the trust attributable to the transferred property. For many people with grantor revocable trusts this will have no impact on their estate because this aspect of the 2013 proposal is going after defective grantor trusts. I will just say that defective grantor trusts are very high level estate planning and leave it at that.

Basics of Estate Planning: The Second Marriage and Intestacy

I have seen a number of articles declaring approximately 70% of all Americans do not have a will. If they died, that would mean the distribution of their estate would be controlled by intestate provisions. In my February 2010 Newsletter, I discussed the basics of intestacy. For those in second marriages, the importance of drafting an estate plan and not succumbing to the intestate provisions is very important, as demonstrated below.

As I mentioned in 2010, there is an order of priority in which beneficiaries inherit assets under intestate statues. Order of priority is governed by the familial relationship of the beneficiary to the decedent. In other words, family members related closer to the decedent generally get a share and cut-off those family members not as closely related. But, every state's laws are different when determining this order or degree of familial closeness.

Intestate statutes also dictate what percentage a beneficiary will receive from the decedent. Each state has different rules related to that percentage a beneficiary is entitled to receive from the decedent.

The best way to demonstrate what I am talking about is to demonstrate how each local jurisdiction (Virginia, the District of Columbia and Maryland) divides out the probate estate of a person dying without a will. In our case, the decedent was a husband that was on his second marriage and has children (one from this marriage and another from the previous marriage). To further complicate the scenario, I will say the children were not minors and assume that the probate estate amounted to $100,000 after all taxes, estate expenses, allowances and debts were settled.

For Virginia, this scenario is governed by Title 64.1, Wills and Decedents' Estates, Chapter 1, Descent and Distribution), and it reads:

To the surviving spouse of the intestate, unless the intestate is survived by children or their descendants, one or more of whom are not children or their descendants of the surviving spouse, in which case two-thirds of such estate shall pass to all the intestate's children and their descendants and the remaining one-third of such estate shall pass to the intestate's surviving spouse.

In plain English, the second wife will only receive one-third (1/3) of the husband's probate estate and the remaining two-thirds (2/3) will be split evenly between the children. In this case, the wife gets $33,333. As you can see, if the wife was going to rely on the full probate estate to live off of, then 1/3 of the estate is not likely going to cut it.

If there were no children from a prior marriage, the wife would have inherited everything and received the entire $100,000.

For Maryland, this scenario is governed by Maryland Code: Estate and Trusts, Title 3. Intestate Succession and Statutory Shares and it reads:

No surviving minor child, but surviving issue.- If there is no surviving minor child, but there is surviving issue, the share shall be the first $15,000 plus one-half of the residue.

In plain English, the second wife will receive the first $15,000 of the estate plus one-half (1/2) of the husband's probate estate. The children split the remaining half. In this case, the wife received $57, 500. If the children were minors, the wife would have received only one-half (1/2) of the husband's probate estate or $50,000.

For the District of Columbia, the scenario is governed by Division III, Decedents' Estates and Fiduciary Relations, Title 19, Descent and Distribution and it reads:

Share of spouse or domestic partner.- One-half of any balance of the intestate estate, if one or more of the decedent's surviving descendants are not descendants of the surviving spouse or surviving domestic partner.

In plain English, it means the second wife will receive one-half (1/2) of the husband's probate estate. The children split the remaining half. In this case, the wife receives $50,000.

Three separate jurisdictions resulted in three different results and a perfect demonstration that estate planning is vital in second marriages.

Update on Estate of the Month: More on Viola Drath Murder Trial

I guess it comes as no surprise that the Viola Drath murder trial has seen numerous twists and turns. You can read more about her death in "Local Socialite's Inheritance Document Leads to Arrest of Husband for her Death." I posted an update here in December 2011 when Mr. Muth, who is on trial for her murder, fired his attorneys and decided to represent himself in his trial.

I guess it didn't take long for the Judge to grow tired of Mr. Muth's ability as an attorney. On February 9, 2012, D.C. Superior Court Judge Russell F. Canan ruled that Mr. Muth was mentally unfit to represent himself at trial, and the Court appointed attorneys from the District's Public Defender Service as his counsel. On February 13th, because of a hunger strike by Mr. Muth, the Court ruled that Mr. Muth was mentally incompetent for trial and ordered to a psychiatric hospital for evaluation.

There has been no additional information at this stage in the trial re-starting but I will update the matter if it warrants.

Estate of the Month: Funeral Arrangements and Why Whitney Houston Had a Funeral in New Jersey

As a child of the 80's, I can still vividly remember Whitney Houston belting out hits like "I Wanna Dance with Somebody (Who Loves Me)" and "How Will I Know" from my days of watching MTV. So, I was sadden, but maybe not surprised, to hear about her passing on February 11, 2012. Just like many of the celebrities I have discussed, Whitney Houston's estate issues are another teaching moment.

Without even addressing asset distribution, Whitney Houston’s estate issues start almost right after her passing. There are numerous reports that various family members argued over Whitney Houston’s funeral arrangements. It appears that some of Houston’s family wished her to be buried in Newark, NJ, where she was born. However, Cissy Houston, Houston’s mother, and Houston’s cousin, Dionne Warwick, both wanted her to be buried in Atlanta. They argued that Atlanta was where Houston had her most fond memories. It was eventually decided that Houston would be buried in New Hope Baptist Church located in Newark.

Now, what does the funeral arrangement of a multi-Grammy winner have in common with the Average Joe? Simple, funeral arrangements are an issue for someone's estate and even the less affluent tend to want to have a say on how the decedent is remembered.

Many of my clients, particularly those in the military, have complex funeral arrangements that can require a week or more of planning. You could look up the requirements for burial at Arlington National Cemetery sometimes it can be a 128 day wait Other clients have very simple funeral arrangements like only cremating the decedent and throwing a party.

If you want to have some say in how people will say goodbye? You should take time to draft funeral arrangements. Most states require survivors to honor the written wishes of the decedent, though it is not a guarantee due to unforeseen circumstances that could impact your funeral arrangement. Appointing an agent is important to ensure your directions are followed.

If you draft funeral arrangements, make sure that you make someone aware of those arrangements, particularly your agent. Often a decedent will draft funeral arrangements and not tell anyone. The decedent will place the funeral arrangement letter with the decedent's will trusting that the decedent's personal representative will find the letter and follow through on the directions. However, unfortunately, most people do not look for the will until after the funeral. Thus, the decedent's wishes on a funeral might not be followed.

The basic takeaway from planning your funeral is like all other estate planning documents: Make sure that the necessary people are aware documents exist describing your preferred or planned funeral arrangements and that those people know where to locate those documents.

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