Still Peering Over the "Fiscal Cliff" T-Minus 29 days

Two months ago I wrote about the significant tax increases that may take effect in 2013. While some of the changes are due to the Affordable Care Act (aka "Obamacare"), the biggest source of potential tax hikes is the so-called fiscal cliff. Basically, budget sequestration start hitting the federal budget and the Bush tax cuts, and several other tax-reducing measures are set to expire automatically on January 1, 2013. As a result, total tax revenues are estimated to increase by about 20% from 2012 to 2013. While the extra tax revenue would help lower the federal budget deficit, many observers fear that such a dramatic and sudden increase in taxes could send the economy back into recession.

Of course, the expected impact could easily be softened, by enacting legislation to extend some or all of the expiring tax cuts. There has been broad bipartisan support for this approach, though with predictable disagreements over which tax cuts should be extended. Unfortunately, Congress and the President have made little real effort in previous months to reach an agreement, presumably because of the uncertainty that comes with an election year. Now that the elections are out of the way, there appears to be some activity on this front. Though some news late this week is does not appear promising.

With President Obama winning a second term, and Republicans maintaining control of the House of Representatives, we are mostly in the same position as before. Both sides will have to compromise on a mix of tax increases and spending cuts, if they wish to avoid the full fiscal cliff. So far, public statements seem to indicate that the two sides are far from an agreement. As far as taxes are concerned, it appears certain that any deal will include higher tax rates for those earning more than $250,000--a policy that Obama had advocated during the campaign.

Meanwhile, the estate tax has been somewhat overlooked, as most of the attention has been on income taxes. Another report reveals that Obama still favors a return to 2009 rates ($3.5 million exemption, 45%), as he did in his 2013 Budget Proposal back in February. However, he faces resistance from within his own party on this issue. Several Democrats from farm-heavy states including Mary Landrieu (D-Louisiana) and Max Baucus (D-Montana.), chairman of the Senate Finance Committee, strongly prefer that the estate tax remain at present levels ($5.12 million exemption, 35%). Since the estate tax seems less important than income taxes in the overall discussion, it's possible (and maybe even likely) that a final ddeal simply kicks-the-can down the road extending the 2012 estate tax laws to the end of 2013, in order to avoid a Democratic revolt over the issue.

At this point, it's still too early to say much about the contents of the eventual deal. But with January 1 rapidly approaching, the parties will be under intense pressure to produce an agreement within the next few weeks. Of course, a final bill may not be enacted until after the new year begins, in which case its provisions will probably be made retroactiveⁱ . In the meantime, as more details become known, you should consider meeting with your CPA or estate planning attorney to discuss options for minimizing the impact of potential tax changes.

In the short term, such a large-scale change to the law creates extra inconvenience for attorneys. Attorneys impacted by the change will have to set out to memorize a a whole new set of Code numbers for frequently used provisions. In the long term, though, hopefully these changes will lead to increased efficiency, with more of the relevant law residing in one place within the Code.

Basics of Estate Planning: The Personal Representative

In the probate context, "personal representative" is a general term for someone who has been granted the power to handle the affairs of an estate, and distribute its assets. Broadly speaking, there are two types of personal representatives ("PR"). If the personal representative was named in a valid will, such a person is called an "executor" or "executrix" depending on the gender of the PR. If the deceased died intestate (that is, without a valid will), the personal representative is called an "administrator" or "administratrix." There are some important differences between executors and administrators, but in general, the roles and responsibilities of the two are similar in nature.

In order to become a personal representative, one must first qualify with the proper court. For example, in Virginia, the proper court is the Circuit Court where the decedent resided at death (for residents), or where the decedent owned real estate or other assets in Virginia (for nonresidents). To qualify, a personal representative must provide required information about himself/herself and the decedent, including a list of heirs, and must also give an oath and bond to faithfully perform the duties of the position. If a will names an individual as a personal representative, usually that person will qualify at the same time the will is admitted into probate. If there is no will, local state law provides detailed rules as to who can qualify as a personal representative, and when they may do so.

It should be noted that in certain cases, it might be unnecessary to have a personal representative for an estate. For instance, if all or substantially all of the decedent's assets will pass to others through joint tenancy with right of survivorship, there may be no need for a personal representative. Similarly, for small value estates there may not be the need for a PR or one with limited powersⁱⁱ .

Personal representatives assume a wide range of responsibilities relating to their estates. First, they are tasked with finding and taking possession of the estate's assets. They must then manage the estate's assets during the administration period. Management may require activities as varied as buying and selling stocks or arranging for necessary repairs to a home. Meanwhile, they must identify and pay the legitimate enforceable debts of the estate, file the decedent's final tax return and pay any income and estate taxes, and distribute the remaining assets according to the will's instructions or the intestacy laws of the state. Finally, they must file detailed accounts of the estate's assets, at the beginning of administration and annually thereafter until the estate has been completely settled. For more information on the probate process in Virginia click here.

In short, taking on the role of personal representative can be a significant commitment. There is a large amount of responsibility involved, and the consequences of a mistake can be severe. If you are serving or will serve as a personal representative of an estate, don't hesitate to seek out guidance from an attorney, accountant, or other professional advisor if you have questions about any part of the process.

Estate of the Month: Too Much Day Dream Believing Leads to Estate Problem

November's Estate of the Month takes a break from football figures to focus on another well-known musical celebrity. Davy Jones, the British musician and lead singer of The Monkees, died this past February at the age of 66, near his home in Indiantown, Florida. Jones was survived by four daughters from his first two marriages, whose ages range from 24 to 42 years old. He was also survived by his third wife, 33-year-old Jessica Pacheco.

The situation described above immediately sounds like a recipe for familial discord. Unfortunately, that appears to have been the case. There are numerous reports that Jones's daughters had shunned his new wife since their wedding in August 2009. And when he died, Jones inadvertently made a bad situation much worse, through a basic estate planning mistake. His will was dated March 30, 2004 -- more than five years before he had married Ms. Pacheco. Even though they had been married for about two-and-a-half years by the time he died, Jones never got around to updating his will.

Since Ms. Pacheco had obviously not been mentioned specifically in Jones' will, she sued to be admitted as a "pretermitted spouse." A pretermitted spouse, is similar to a pretermitted child, is a spouse that married the decedent after the will was created. Under Florida law, as a pretermitted spouse, Ms. Pacheco would be entitled to one-half of Jones' estate, unless a prenuptial agreement provided for her separately from the will, or the will itself had a provision denying a share of the estate to future spouses.

The legal dispute over the will is ongoing, but in this case, we can't actually examine the will ourselves. In an extremely rare order, the probate judge granted a petition from Jones' daughters to seal Jones' will and related documents, on the ground that "public opinion could have a material effect on his copyrights, royalties, and ongoing goodwill." I guess Davy Jones' estate's attorney is a more zealous advocate than Joe Paterno's attorney.

In the end, Davy Jones' outdated will created three unpleasant problems for his estate. First, he forfeited the opportunity to decide for himself the relative shares that his wife and daughters would receive from his estate. Second, he added a great deal of fuel to an already-burning family conflict, leading to further anger and hurt feelings between his loved ones. Finally, if not for a clever and unusual legal argument, his will would have revealed private financial details to all of his family and the public at large. Sadly, just a simple meeting with his estate planning attorney any time within the last two years could have prevented these problems.

ⁱSee United States v. Carlton, 512 U.S. 26 (1994), creating a two-part test holding a retroactive tax applies if: (1) the legislation has a rational legislative purpose and is not arbitrary; and (2) the period of retroactivity is not excessive.

ⁱⁱ In Virginia, estates valued under $50,000, Virginia law allows for the transfer of certain assets (such as automobiles, bank accounts, etc.) to heirs or beneficiaries, without need for a personal representative. D.C. has small estate provision where the decedent owned assets with a total value of $40,000 or less. Maryland just amended their small estate administrations for decedents dying on October 1, 2012 stating assets subject to administration valued at $50,000 or less ($100,000 if the spouse is the sole legatee or heir) would be governed by the small estate administrations.