Wednesday, April 28, 2010

Heavy Estate Taxes to Hit Middle Class in 2011

Why Planning Now is More Important Than Ever.

For 93 years there has been an estate tax. 2010 is an historical year, the only year since 1916 there has been no estate tax. This does not mean the estate tax has been repealed. No, no! The estate tax has only been suspended for one year. The tax comes back with a fury in ten short months in 2011.

Numerous proposals have been made to lift this suspension and reimpose the estate tax on all those who die in 2010, retroactive to January 1. The following is my analysis of why there will be no estate tax in 2010, and why 2011 will hit the heirs of estate planning procrastinators right between the eyes.

No Political Motivation to Reinstate the Estate Tax.

The first reason why there will be no estate tax in 2010 is that both Republican and Democrat members of Congress have no political reason to do so.

Consider. In this important midterm election year, the Republicans are in a beautiful political position regarding the estate tax. Those Republicans up for reelection can brag to their constituents that they (and the Bush Administration) successfully rid the country of the dreaded death tax. They can brag that there is currently no estate tax, thanks to their untiring efforts. They can point to their nasty Democrat opponents who, lockstep with the Obama Administration, want to reinstate the death tax. For the Republicans, it plays exceptionally well to sit tight right up to November and not encourage any reinstatement of the estate tax.

Of course, the Republicans will not emphasize that the estate tax is set to return in 2011, exempting only $1 million from estate taxes, instead of the $3.5 million that was exempted from estate taxes just last year. Rather, the Republicans will be content to bask in the glory of their temporary 2010 victory over estate taxes and not push for any change.

From the Democrat's perspective, this is also a critical election year politically. The Democrats (including key leaders such as Harry Reid) are in tight races this November against conservatives with conservative agendas. These Democrats don't want to be in a position in their reelection campaigns to be arguing for reinstatement of the nasty death tax. A couple of years ago, the Democrats were in a good negotiating position with the Republicans in arguing how much the estate tax exemption should be: $3.5 million, $5 million, $7 million. This year, the picture is very different. There is no estate tax at all and the Democrats are in the unenviable position of essentially arguing whether there should even be a death tax! For the Democrates, this is not a good position to be in. So even though they may approve of the estate tax philosophically, they are unlikely to push for reinstatement of the estate tax for 2010 for their own political survival.

And this is all in 2010. It is 2011 politics that is also driving the picture this year. While the Democrats may be the guys down in 2010 on the estate tax issue, come 2011, the Republicans will be the guys being kicked in the head. Remember, the Republicans can crow this year in their reelection campaigns that there is no estate tax (and again, for their short-term political gain, they are very unlikely to emphasize the estate tax will return in 2011). Now if the Democrats simply avoid the estate tax fight this year, just bide their time and not push for estate tax reinstatement, then in 2011 when there is an estate tax on every dollar above a measly $1 million (Insurance policies alone push vast numbers of middle class taxpayers above the $1 million threshold.), then guess who is going to be on the hot seat in regard to estate taxes? That’s right, the Republicans.

You can hear the Republicans already in 2011: “Oh,” they will say, “look at this terrible death tax we are facing: it is all the fault of those limousine liberals, those terrible Democrats.” The Republicans can play off the Democrats in this way politically. But in reality, it is the Democrats who are sitting pretty on the actual issue of the estate tax. The Democrats are in the perfect position in 2011 to negotiate a low estate tax exemption or just not negotiate at all, and keep it at $1 million and let the Republicans sweat and start the fight for estate tax reform! Once the Republicans begin the fight for reform, the Democrats can argue, “well, we will agree to increase the estate tax exemption to . . . oh, let's say $2 million.”

All the Democrats have to do is wait another ten months for the above scenario to play out, and the country may well be faced with an estate tax exemption of $1 million (maybe $ 2 million after some negotiating), where it was $3.5 million just last year. The Democrats are in the perfect position to beat up on the Republicans in 2011, by just sitting tight and taking their lumps this year.

Monetary Motivations to Postpone Reinstatemetn of the Estate Tax.

The second reason why there will be no estate tax in 2010 is that both Republican and Democrat members of Congress have monetary motivations to postpone reinstatement of the estate tax.

In this election year both the Republicans and the Democrats can enrich themselves and their reelection coffers by playing to both sides of the estate planning debate. The more smoke they can create (saying, “oh, we need to do something about this estate tax”), the more money the pro-estate tax lobbyists will throw at the Democrats and the more money the anti-death tax lobbyists will throw at the Republicans. As we know, these funds thrown at politicians can be used for a variety of purposes to their advantage and even for their ultimate personal benefit. So why cut off the hand that feeds you, by actually doing something?

The Obama Administration is Monetarily Motivated
to Create Uncertainty by Delaying Reinstatment of the Estate Tax

What about the IRS–the Treasury Department? Don’t they want to push estate tax reinstatement? Let’s look at the estate tax reform from the prospective of the Obama Treasury Department. The Treasury will in fact lose a bit of revenue if the estate tax is not reinstated for the year 2010. A bit of revenue (relatively speaking) will be lost on those wealthy individuals who die this year and avoid paying any estate tax.

However, the heirs of anyone dying a few seconds into the new day of January 1, 2011 (and thereafter) are in for a big surprise–to the benefit of the IRS. A meager one million dollar exemption from estate taxes in 2011 will hit wealthy and many middle class tax payers dying in 2011. The heirs of these decedents will be writing out checks that very likely will make up for the lost revenues in 2010.

In reality, the IRS and Obama Administration have no extraordinary motivation to push reinstatement of the estate tax in 2010. The Treasury Department will get theirs. It may be in 2011 and thereafter, but they will get theirs. (What the Obama Administration would really like is to eliminate certain advantages to taxpayers under current estate tax law, such as GRAT terms and partnership discounts. However, this desire of the Administration could happen under the radar, with reinstatement of the estate tax for 2010 being quietly abandoned or not emphasized.)

But there is something even nastier about all this. Consider the uncertainty regarding the estate tax. The IRS in fact takes full advantage of this uncertainty to bring in more revenue. Uncertainty in estate tax planning has benefitted the Service immensely. Many individuals potentially subject to estate taxes procrastinate and delay and say, “well there may not be an estate tax this year” or “the exemption will probably increase” or “my congressman will make sure there’s no estate tax” or “something good will happen.”

Uncertainty motivates people to inaction. It prompts people not to do any planning and in the process of failing to do planning, the IRS ultimately benefits because existing laws often require effective planning to be done several years before an individual dies. So the more uncertainty there is, the more people will delay planning, and the more likelihood hefty checks will be written to the IRS down the road. All the political machinations and maneuvers currently underway, all the talk by the Administration or members of Congress, plays out perfectly for the Service in creating uncertainty and motivating inaction.

Escape Clause

To save face here, I must say that my entire analysis above fails in one scenario: the Republicans recognize the long-term advantage to them of agreeing with the Democrats to reinstate the estate tax this year, despite the short-term political damage that may cause. What do you think? Will the Republicans look long term or short term on this issue this election year?

What to Do?

What does this mean for clients? Consider reality. There will be an estate tax. THERE WILL BE AN ESTATE TAX! It is time for individuals to face reality. The estate tax will come back with a vengeance and it may be too late by then for all those individuals who keep on waiting to plan “until things settle down.” A time of uncertainty is the perfect time to plan.

My advice in regard to taxes is to plan for the worst; pray for the best; and then accept with optimism and peace that the worst will in fact happen.

Craig E. Hughes
170 South Main, Suite 375
Salt Lake City, Utah 84101

Son, You Can Have your Inheritance Only if You Marry a Good Jewish Girl

Max Feinberg stipulated in his will that each of his beneficiaries would receive their inheritance only if they married someone of the Jewish faith or the beneficiary's spouse converted to Judaism within one year of marriage. Only one beneficiary met the requirement. Another beneficiary sued. The Court held that because the beneficiaries had no legal ownership interest in the trust property at Mr. Feinberg's death and because Mr. Feinberg's requirement did not violate any public policy, then Mr. Feinberg's instructions in his will were perfectly valid and enforceable.

If the will had directed that Mr. Feinberg's beneficiaries receive their inheritance only if they assassinated the local mayor, then that would violate public policy against murdering the local mayor. Any term in a will that calls for violation of a law in order to receive an inheritance will be held invalid. Otherwise, you have pretty much free rein to decide under what conditions your assets will be distributed.

For information regarding the Max Feinberg case go to:
In Re Estate of Max Feinberg v. Feinberg
In re Max Feinberg
Max Feinberg

Tuesday, April 27, 2010

What Do You Do When You Inherit Poems?

In 1994, David Broza, an Israeli balladeer, performed once in a small concert with Townes Van Zandt, a Texan singer and songwriter. When Mr. Van Zandt died in 1997, he bequeathed his unpublished poems to Mr. Broza. An unexpected inheritance for Mr. Broza. Eight years after Mr. Van Zandt's death, Mr. Broza, in tribute to Mr. Van Zandt, turned the poems into songs. In 2010, Mr. Broza produced an album "Night Dawn: The Unpublished Poetry of Townes Van Zandt." A nice tribute and great music and lyrics. Check it out