2013 Estate Tax Law

January 11th, 2013

THE NEW ESTATE TAX LAW


Does It Eliminate The Need For A Bypass Trust?

Terry Thompson Law.com
Office: (925) 855-1507

2013 Tax-Law


The $5 million exemption
Congress knew that they had to act for two years but for purely political reasons waited until the last minute to extend the “Bush era tax cuts” for most taxpayers. There was great surprise, however, when congress finally passed the new estate tax law on January 1, 2013. Few people had predicted that congress would keep the estate tax exemption level at $5 million per person! And….. the $5 million exemption will be indexed for inflation. For 2012 the indexed amount was $5,120,00 and for 2013 it will be $5,250,000 per person..The “death tax” exemption was scheduled to revert back to the pre Tax Relief Act of 2001 level of $1 million per person on January 1, 2013 if congress did not act. The $3.5 million exemption level that existed in 2009 was the highest that most analysts felt could be hoped for.

However the top tax rate, on estates that exceed the exemption level, will go up to 40% from the current 35%, rather than the scheduled 55% that would have been imposed if congress did not act. These changes are “permanent” which doesn’t really mean permanent…only that congress must act to change them. However, congressmen typically don’t like to take things away from voters since it can hurt their reelection prospects. For this reason, there is some hope that the death tax exemption level and tax rates will continue for an extended time.

The Portability Provision
One of the most beneficial aspects of the new tax bill is continuation of the exemption “portability” provision. This provision allows the executor or trustee to transfer the unused portion of the deceased spouse’s estate tax exemption to the surviving spouse. This means that a married couple can be assured of being able to take advantage of the $5 million indexed exemption for each spouse, without the need for a bypass trust. Previously it was necessary to use a bypass trust to capture the deceased spouse’s exemption and, even then, one would lose the difference between the exemption level and the amount of the value of the deceased spouse’s estate. So, there is no more need for a bypass trust…….right?  Well, not so fast!

Shall I Deep Six My Bypass Trust?
In many cases, it is true, that there will be no need for the bypass trust. But before you call your estate planning attorney and tell him to amend your trust and remove the bypass trust, consider the following:

First, you still need to have a trust to avoid probate. This is one of the major reasons for having a trust and it still exists. So even though you may want to amend your trust, the trust itself is still a valuable estate planning tool that you definitely want to keep in force.

Second, if you are in a second marriage or if you want to make sure that your spouse doesn’t change the named beneficiaries after you die, you need an irrevocable bypass trust to lock in beneficiaries for your portion of the estate. If you have a bypass trust it will be irrevocable and your surviving spouse will not be permitted to change the beneficiaries you have designated for your portion of the estate no matter if there is subsequent marriage or any other reason he may have for wanting to disinherit your named beneficiaries.

Third, a bypass trust may come in handy to protect rapidly appreciating assets in the deceased spouse’s estate. If the deceased spouse’s assets are expected to appreciate in value at a more rapid rate the inflation index, you can utilize the bypass trust to protect those assets from future estate taxes on the amount that exceeds the indexed exemption rate. For example if  your spouse dies in 2013 and has a $5 million estate you could shield all of those assets from future taxes regardless of how much their value appreciates in future years by use of the bypass trust. If you didn’t use the bypass trust and just transferred the assets and the unused exemption to the surviving spouse, then the surviving spouse would have to pay 40% estate taxes on the amount that the deceased spouse’s estate appreciated in excess of the index. For example, consider the case in which the deceased spouse’s estate had a value $5 million when he died and it appreciated to $8 million six years later. At a likely index inflation rate of 3%, the indexed estate tax exemption would be about $6 million. Therefore, when the surviving spouse passed away, the estate would incur a tax of  40% of the added $2 million, i.e. $800,000. In this case, using the bypass trust would be very valuable.

When should You Bypass the Bypass Trust?
If you don’t have assets that will potentially appreciate in value and there is no concern about locking in beneficiaries, then you (i.e. your executor or trustee) may opt to not use the bypass trust. There is a caution however. If you simply bequeath all you assets to your spouse, your executor will still have to prepare an estate tax return to determine the amount of the unused estate tax exemption and to proactively make the election to transfer this unused exemption to the surviving spouse. Previously, with smaller estates, it was usually not necessary to prepare and file an estate tax return (IRS form 706). With the new portability law, however, it will now be necessary to file such a return if you want to take advantage of the ability to transfer the unused exemption. This is good news for CPAs but not so good news for executors of  small estates. The executor must decide whether to spend the money on preparing and filing an estate tax return or gambling that the estate will remain small and will not need the unused portion of the deceased spouse’s exemption.

Consult Your Attorney
No attorney, and certainly not this one, would end an article with out cautioning the reader to consult their attorney regarding the impact of the new estate tax law on your particular situation. New trusts should take the portability provision into account and most existing trusts will probably need to be amended to fully take advantage of the new portability clause.

THE NEW ESTATE TAX LAW

December 21st, 2010

Does It Eliminate The Need For A Bypass Trust?

Terry Thompson Law.com
Office: (925) 855-1507

estate-taxes

The $5 million exemption
Congress knew that they had to act for years but for purely political reasons waited until the last minute to extend the “Bush era tax cuts.” There was great surprise, however, when congress finally passed the new estate tax law and the President signed it into law on December 17th. Few people had predicted that they would raise the estate tax  exemption to $5 million per person! Technically, of course, this was not an increase in the exemption since there was no estate tax in 2010. However, the “death tax” exemption was scheduled to revert back to the pre Tax Relief Act of 2001 level of $1 million per person on January 1, 2011 if congress did not act. The $5 million exemption is a 43% increase over the $3.5 million exemption level that existed in 2009 and which most analysts felt was the best that could be hoped for. And….. the $5 million exemption will be indexed for inflation.

In addition the top tax rate, on estates that exceed the exemption level, will go down to 35% starting in 2011, rather than the scheduled 55% that would have been imposed if congress did not act. Before we get too excited, we need to remember that these provisions are only for two years. We still don’t know what congress will do at the end of the two year period. The only thing that is certain is uncertainty! However, congressmen typically don’t like to take things away from voters since it can hurt their reelection prospects. For this reason, there is some hope that the death tax exemption level and tax rates may be continued beyond the two year period.

The Portability Provision
One of the most beneficial aspects of the new tax bill is the exemption “portability” provision. This provision allows the executor to transfer the unused portion of the deceased spouse’s estate tax exemption to the surviving spouse. This means that a married couple can be assured of being able to take advantage of the $5 million indexed exemption for each spouse, without the need for a bypass trust. Previously it was necessary to use a bypass trust to capture the deceased spouse’s exemption and, even then, one would lose the difference between the exemption level and the amount of the value of the deceased spouse’s estate. So, there is no more need for a bypass trust…….right?  Well, not so fast!

Shall I Deep Six My Bypass Trust?
In many cases, it is true, that there will be no need for the bypass trust. But before you call your estate planning attorney and tell him to amend your trust and remove the bypass trust, consider the following:

First, you still need to have a trust to avoid probate. This is one of the major reasons for having a trust and it still exists. So even though you may want to amend your trust, the trust itself is still a valuable estate planning tool that you definitely want to keep in force.

Second, if you are in a second marriage or if you want to make sure that your spouse doesn’t change the named beneficiaries after you die, you need an irrevocable bypass trust to lock in beneficiaries for your portion of the estate. If you have a bypass trust it will be irrevocable and your surviving spouse will not be permitted to change the beneficiaries you have designated for your portion of the estate no matter if there is subsequent marriage or any other reason he may have for wanting to disinherit your named beneficiaries.

Third, a bypass trust may come in handy to protect rapidly appreciating assets in the deceased spouse’s estate. If the deceased spouse’s assets are expected to appreciate in value at a more rapid rate the inflation index, you can utilize the bypass trust to protect those assets from future estate taxes on the amount that exceeds the indexed exemption rate. For example if  your spouse dies in 2011 and has a $5 million estate you could shield all of those assets from future taxes regardless of how much their value appreciates in future years by use of the bypass trust. If you didn’t use the bypass trust and just transferred the assets and the unused exemption to the surviving spouse, then the surviving spouse would have to pay 35% estate taxes on the amount that the deceased spouse’s estate appreciated in excess of the index. For example, consider the case in which the deceased spouse’s estate had a value $5 million when he died and it appreciated to $8 million six years later. At a likely index inflation rate of  3%, the indexed estate tax exemption would be about $6 million. Therefore, when the surviving spouse passed away, the estate would incur a tax of  35% of the added $2 million, i.e. $700,000. In this case, using the bypass trust would be very valuable.

When should You Bypass the Bypass Trust?
If you don’t have assets that will potentially appreciate in value and there is no concern about locking in beneficiaries, then you (i.e. your executor or trustee) may opt to not use the bypass trust. There is a caution however. If you simply bequeath all you assets to your spouse, your executor will still have to prepare an estate tax return to determine the amount of the unused estate tax exemption and to proactively make the election to transfer this unused exemption to the surviving spouse. Previously, with smaller estates, it was usually not necessary to prepare and file an estate tax return (IRS form 706). With the new portability law, however, it will now be necessary to file such a return if you want to take advantage of the ability to transfer the unused exemption. This is good news for CPAs but not so good news for executors of  small estates. The executor must decide whether to spend the money on preparing and filing an estate tax return or gambling that the estate will remain small and will not need the unused portion of the deceased spouse’s exemption.

Consult Your Attorney
No attorney, and certainly not this one, would end an article with out cautioning the reader to consult their attorney regarding the impact of the new estate tax law on your particular situation. New trusts should take the portability provision into account and most existing trusts will probably need to be amended to fully take advantage of the new portability clause.

Please Visit our website at: www.terrythompsonlaw.com

Ben Franklin and the Lodi City Council

November 1st, 2009

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It was the summer of 1787. The 55 delegates to the Constitutional Convention had been in session for nearly six weeks and they were at a stalemate. The weather was hot and so were their tempers. Late in the afternoon of June 28th, the senior member of the group, 81 year old Ben Franklin, rose and addressed the delegates. He recalled that in the contest with Great Britain they had daily prayer for Divine protection and their prayers were graciously answered, but in this Constitutional Convention they had not once applied to “the Father of lights to illuminate” their understanding. Franklin moved that “thenceforth prayers imploring the assistance of Heaven and its blessing on our deliberations…be held every morning before we proceed to business.”  That was the turning point in the convention. Prayers have opened both houses of Congress ever since.

Ironically, two hundred and twenty two years later the city of Lodi, which also adopted a policy of opening their meetings with prayer, was threatened with a lawsuit saying that their opening prayer was unconstitutional! How can this be? The problem is that the meaning of the word “unconstitutional” is not what most Americans think. It has little to do with the plain meaning of the words in the constitution. The current U.S. judicial system is based on the case study method (or the concept of precedent) which was originated at Harvard in the late 1800’s by Christopher Columbus Langdell. The system is based on analyzing rulings from previous Appellate or Supreme Court cases, with the most recent and highest court rulings taking precedence over previous rulings. For example, you could begin with one clause of the constitution that clearly says black is black. A subsequent court might say that black is gray and another court later say that it is light gray and finally years later the Supreme Court rules that black is white! This is what happened to the “establishment clause” of the First Amendment to the Constitution which states that “Congress shall make no law respecting an establishment of religion….” It was intended by our founders simply to prevent Congress from establishing a national religious denomination such as they had in England. In recent years the establishment clause has been turned on its head by liberal judges to mean the complete opposite of its original intent!

The Freedom from Religion Foundation, an atheistic organization headquartered in Wisconsin, threatened a lawsuit against the City of Lodi for allowing pastors to pray in Jesus name before council meetings. This conflict quickly gained national attention and when the council finally called a meeting to vote on the issue the city had to rent an auditorium holding 900 people! How could a simple invocation before a council meeting become such a big issue? In 1983 the U.S. Supreme court, in Marsh v. Chambers 463 U.S. 783, held that a state legislature’s practice of paying a Christian pastor to pray before legislative sessions did not violate the establishment clause of the first amendment. That should have settled it but in a troubling 2006 California case, Rubin v. Burbank, 101 Cal.App.4th 1194, the court held that prayer before council meetings was “government speech” and that it must be censored to remove all sectarian references. As this author told the Lodi City council, giving a non-sectarian prayer is like having a banquet with no food!

Fortunately, the courageous Lodi City Council voted 5 to 0 to allow uncensored prayer before their meetings. However, in an attempt to avoid future lawsuits, the city council’s proposed policy added these conditions:

Invocations will be given before the meeting is called to order.

  1. Lodi religious leaders of all faiths will be invited to give the invocation.
  2. Non-religious groups will be given the opportunity to give a “Call to Civic Responsibility” in lieu of an invocation.
  3. A disclaimer will be included on the agenda that the prayers are voluntary and don’t necessarily reflect the council’s views.
  4. Invocations that directly seek to convert or demean a particular religious belief or lack thereof will be prohibited.

For now, the Lodi City Council made the tough but right decision and has followed the example of Ben and the 55 founders. Let’s pray (in Jesus’ name) that they have the courage to stay the course!

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A Plan for Your Life

November 1st, 2009

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 The liberal legislator proudly proclaims, “I love you and have a wonderful plan for your life!” Obama and the Chicago disciples of Saul Alinsky want to turn this into a socialist/Marxist country and control our lives. They know what is best for us. What ever happened to life, liberty and the pursuit of happiness? Now it’s strife, misery and the receipt of welfare! Our freedoms and the free market system are rapidly being destroyed! Where are the 21st century defenders of freedom?

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