Death and Taxes - The Blog

Federal Estate Tax Repeal, Part 11: The Vote Postponed, and The Wall Street Journal Speaks Up

I don't know if it's available online, but yesterday's Wall Street Journal had an editorial about estate tax repeal.  The editorial starts by saying that Senate Majority Leader Bill Frist has decided to delay a vote on repeal until September, and then launches into full attack mode against the estate tax. 

A few comments:

1. The Journal has a big problem with the revenue loss projections calculated by "the unelected number crunchers at the Joint Committee on Taxation (JCT)." 

a. You'll note the use of the word "unelected" here.  The Journal's idea is not that JCT employees should be elected, but rather to suggest (as the Journal does later) that JCT employees be replaced with "a staff whose predictions are at least in the same zip code of economic reality."  In other words, a staff whose predictions are approved of by the Journal.  Of course, such a staff also wouldn't be elected, but that's not really the point.  What's an activist judge?  A judge who rules in a way that I dislike.  What's an unelected government worker?  A government worker who does something (in this case, makes a calculation) that I dislike. 

b. I agree that it's important for us to have a clear picture of the revenue impact of estate tax repeal, but I differ with the Journal in how we obtain this picture.  They cite a study by an economist from the American Family Business Institute, to the effect that the JCT tends to overstate revenue loss from estate tax repeal, but I have to look at AFBI's website (aka "nodeathtax.org"), and wonder whether the group's agenda might have a little something to do with its economist's conclusion.  The Journal says the JCT ignores the impact of "faster economic growth, more savings, more job creation, and more capital investment that can be anticipated" by repeal of the estate tax, yet I wonder why the Journal makes no attempt to quantify this impact.  Are we simply to assume that the estate tax repeal will result in minimal revenue loss (or even a revenue gain) because the Journal says so?

2. The Journal states that there is "overwhelming support for repeal among voters," but I have to ask the basis for this opinion.  Were these polls also conducted by the AFBI?  It seems fairly easy to manipulate responses to an issue most people know very little about.  Will people dislike the estate tax more if I call it "the death tax"?  What if I misrepresent the number of Americans who will be subject to the tax?  On a similar note, the Journal says estate tax repeal "helped to defeat Tom Daschle in South Dakota last year."  However, when I look for evidence of taxable estates in South Dakota, all I can find is this study by AALU (the Association for Advanced Life Underwriting), which states (at the bottom of page 43) that about 74 estates per year will be subject to the tax from 2006-2020.  Did the voters of South Dakota really vote Tom Daschle out of office because he opposed the repeal of a tax that may affect 74 South Dakota estates per year? 

3. The Journal's position on capital gains strikes me as fairly inconsistent (remember that estate tax repeal would also repeal the current "step-up in basis" regime in large part).  In one paragraph, the Journal is criticizing the JCT for ignoring the revenue effect of the capital gains provision in the repeal bill.  Yet three paragraphs later the Journal argues that "[d]eath should not be a taxable event."  It seems to me that this latter position ignores the economic reality of the capital gains provision, namely that death will still be a taxable event for those who most need the money they are inheriting (i.e. most everyone but the super-wealthy). 

4. Near the end of the editorial, the Journal pulls out what appears to be the argument du jour against the estate tax: other countries don't have it.  Remember when the Journal (here) got up in arms over Justice Kennedy's referencing of international law in the juvenile death penalty case of Roper v. Simmons?  Back then, the Journal accused Justice Kennedy of being selective in his use of international law.  But isn't the Journal doing the exact same thing here?  More to the point, is it really relevant to use a list of countries without an estate tax, taken out of context with respect to things like budget deficits and income tax rates, in order to argue for repeal?

5. To me, the biggest question involving estate tax repeal focuses on whether those opposed to repeal will start using the same aggressive tactics as the pro-repeal crowd.  Yes, the estate tax affects a decedent's ability to give away property at death.  But can't it also be said to tax a less-protected type of income (namely, income that you never earned in the first place)?  If the pro-repeal crowd uses family farmers as their poster children, will the anti-repeal crowd begin to employ Paris Hilton and other spoiled heirs for the same purpose?

Federal Estate Tax Repeal, Part 10: NPR Weighs In

National Public Radio has a pretty interesting page devoted to estate tax repeal, including a link to a good  story featured today on Morning Edition, here.

"Unforeseen Circumstances" and the Capital Gains Exclusion

I wrote a little about the $250,000 capital gains exclusion on the sale of a home here.  The basic rule is that you can exclude from taxation up to $250,000 in gains on the sale of real estate, so long as you have owned and occupied the real estate as your principal residence for at least 2 of the previous 5 years.  But even if you don't meet the 2 year "owned and occupied" requirement, you may still be eligible for a partial exclusion from capital gains if you are forced to move due to "unforeseen circumstances," according to this interesting article by Sandra Block of USA Today. 

The Longest Probate

When I give seminars, I always joke about how probate is no longer the long, drawn-out process depicted in Charles Dickens' Bleak House.  However, maybe I'm wrong -- this article discusses a dispute over a house owned by the Estate of Jose Manuel Polonio Rios, which has been in probate since 1925(!).

Realtor Battles in Missouri

This article has a good summary of the ongoing war between regular real estate brokers and so-called discount brokers, and how it has resulted in new legislation in Missouri. 

Discount brokers offer specific services -- like listing a property in the Multiple Listing Service -- in return for a smaller fee or commission than a regular real estate broker would charge.  The Missouri legislation (which passed their House and Senate unanimously, and has been signed by the Governor) requires brokers to be involved in handling and negotiating offers and counteroffers for their clients.  What does all this mean to home buyers and home sellers?  Follow the money and the influence:

-Regular real estate brokers are under a lot of pressure from discount brokers.

-The legislation was sponsored by a real estate agent.

-The Missouri Realtors Association spent $50,000 for a lobbyist to get the Governor to sign the legislation.  The lobbyist has close ties to the Governor's father.

-The Justice Department and the FTC both believe that the legislation (a) will reduce competition among brokers, "causing some home sellers to pay thousands of dollars more in commissions," and (b) "does not address any demonstrated consumer harm."

I think there could be an analogous situation to my estate planning practice here.  A discount broker might be the equivalent of an estate planning attorney who charges a small fixed fee to review estate planning documents drafted by the client using Will and Trust software.  Would I ever offer such a service?  No -- I think the risk (potential malpractice because I didn't catch a mistake in a document I didn't draft) far exceeds the reward.  But do I oppose the right of all Illinois attorneys to offer such a service?  Of course not.  Even though I think my rates are reasonable, I know that not everyone agrees and that not everyone can afford (or even wants) my services.  Shouldn't consumers who want less be able to pay less?

A Bit More on Disclaimers

As I discussed yesterday, disclaimers are a way of saying "thanks but no thanks" to a gift of property.  They are usually used in connection with gifts made at death, in one of two scenarios:

1. The tainted property scenario.  The situation in yesterday's post would qualify here -- if you are given property that may be subject to litigation or is otherwise encumbered, you may not want to accept it.

2. The estate or gift tax scenario.  This is a more common situation, where you either don't want to increase the size of your estate by accepting an inheritance or you want to (in a sense) steer an inheritance to someone who may need it more.  Let me give a couple of examples:

Ex. 1: Mildred Smith, a widow, dies at age 80.  Mrs. Smith is survived by her son, Kenneth, who is an investment banker.  Mrs. Smith's Will leaves all of her estate ($1.5 million) to Kenneth or, if he doesn't survive her, to Kenneth's three children.  Kenneth already has a net worth of $3 million, and he doesn't need any more property; however, his children are all in their mid-to-late 20's, and are trying to establish themselves.  If Kenneth accepts his gift under his mother's Will, and then passes it on to his three children, he will owe gift tax.  However, Kenneth instead disclaims his gift under his mother's Will -- the gift automatically passes to Kenneth's three children as if Kenneth predeceased his mother, and no gift tax is due.

Ex. 2: Bob Jones, a married man with three children (ages 22, 20 and 18), dies without a Will in 2005 (when the estate tax exemption is $1.5 million).  Under Illinois law, his $5 million estate will pass one-half to his wife and one-half to his three children, which isn't what Mr. Jones would have wanted; to add insult to injury, because a significant amount of his estate will pass to beneficiaries other than his wife (and therefore won't qualify for the marital deduction), an estate tax will be due.  Mr. Jones' children each disclaim all but $500,000 of their inheritance, thereby giving more of Mr. Jones' estate to his wife (their mother) and eliminating any estate tax due (since the sum total of their inheritances equals the amount of the estate tax exemption).

Using a disclaimer to deal with estate tax issues is sometimes described as "post-mortem estate planning" -- that is, you use a disclaimer to create the estate plan the decedent should have executed during his or her life.   This can work very well, so long as you don't run afoul of the many rules relating to disclaimers.  Essentially, we're talking about:

State property law.  In Illinois, the main rules are found in §2-7 of the Illinois Probate Act (the Disclaimer Under Nontestamentary Instrument Act, at 760 ILCS 25, is also relevant for trusts).  Section 2-7 discusses (among other things) (1) how the representative of a deceased or disabled person or a minor can disclaim on their behalf; (2) the form of the disclaimer; and (3) actions by the person seeking to disclaim that might bar such person from disclaiming property successfully.

Federal Tax law.  The key section of the Internal Revenue Code that discusses disclaimers is §2518.

A few final points:

• In my experience, the biggest impediment to a successful disclaimer is "grabby hands."  In Illinois, you can't disclaim property after you have accepted it.  So, for instance, if you are a surviving spouse, and immediately start making withdrawals from your deceased wife or husband's bank accounts after her or his death, you will probably be barred if you subsequently try to disclaim these accounts.
• While I talk above about "steering" property to other beneficiaries, this can't be done directly.  In other words, you can't direct where the disclaimed property should pass.
• Disclaiming inherited property in order to avoid creditors or to qualify for Medicaid is an increasingly complicated business, and may not be possible.

It may sound like self-interest, but I think the key to dealing with disclaimers is to talk with a probate attorney as soon as possible after a loved one passes away.

Thanks for Nuthin' -- When a Gift Isn't a Gift

Durham, Connecticut has an interesting problem, as set forth in this letter from First Selectwoman Maryann Boord.  The town was bequeathed a piece of real estate by a man named Allan Adams, but it appears that this gift really isn't much of a gift at all.  Why is that?  Because the real estate:

1. must, according to Mr. Adams' Will, be used "exclusively for elderly housing";

2. has some serious environmental problems (with clean-up costs estimated at $2.2 million); and

3. may be subject to claims the State of Connecticut has against Mr. Adams' estate as a whole.

As a result of the above, the town felt it had no choice but to "disclaim" its interest in the real estate.  I'll talk more about disclaimers tomorrow, but essentially they are a way to say "thanks but no thanks" to a gift of property.

Federal Estate Tax Repeal, Part 9: The Senate Vote Approaches

According to this morning's Wall Street Journal (in an article I can't locate online), Senate Republicans are scheduling a vote on federal estate tax repeal for next week.  A couple of points from the article:

1. Republicans know that they don't have the 60 votes necessary to get the legislation approved, but want to either (a) encourage a compromise with or (b) "smoke out" those who oppose repeal.

2. Federal Reserve Chairman Alan Greenspan recently said that Congress shouldn't be cutting taxes unless it can find other revenue to offset the loss to the Treasury.

Guardianship of a Minor: A Few Basics

Question 1: Where can I make my wishes known regarding my choice of guardian for my minor children?

Answer 1: The typical place to designate a guardian is in a Will.  However, it's important to stress that the statute allowing designation of a guardian (755 ILCS 5/11-5) says it can be done in "any writing, including a will."  In other words, it's perfectly acceptable to designate initial and successor guardians in some other document.  That being said, the guardianship designation should adhere to some execution formalities -- it "must be witnessed by 2 or more credible witnesses at least 18 years of age, neither of whom is the person designated as the guardian."

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Question 2: Who may act as a guardian of a minor in Illinois?

Answer 2: A person who the court finds is capable of an active and suitable program of guardianship for the minor(s) and who:

1. is at least 18 years old;

2. is a U.S. resident;

3. is not of unsound mind; and

4. is not himself or herself a disabled person (as defined in the Illinois Probate Act).

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Question 3: Are there different types of guardians?

Answer 3: Yes -- there's a guardian of the person and a guardian of the estate.  These roles can be filled by the same people or by different people.  Under the statute, the two types of guardians are distinguished as follows:

"The guardian of the person shall have the custody, nurture and tuition and shall provide education of the ward and of his children...."

"The guardian... of the ward's estate shall have the care, management and investment of the estate, shall manage the estate frugally and shall apply the income and principal of the estate so far as necessary for the comfort and suitable support and education of the ward [and the ward's dependents], or for any other purpose which the court deems to be for the best interests of the ward...."

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Question 4: I don't like my minor child's other parent, and I would prefer that he or she not be allowed to act as my minor child's guardian if I die.  Can the other parent be stopped from acting as guardian?

Answer 4: Probably not.  With respect to guardianship of the person, 755 ILCS 5/11-7 makes it clear that "[i]f one parent is dead and the surviving parent is competent to transact his own business and is a fit person, he is... entitled [to the custody of the person of the minor and the direction of his education]." 

Another provision of the Illinois Probate Act states that the Court lacks jurisdiction to even deal with a petition for the appointment of a guardian if "the minor has a living parent, adoptive parent or adjudicated parent, whose parental rights have not been terminated, whose whereabouts are known, and who is willing and able to make and carry out day‑to‑day child care decisions concerning the minor...."

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Question 5:  Does my minor child get a say on the question of his or her guardian?

Answer 5:  If the minor child is 14 years old or older, the minor child may nominate individuals to act as guardian of the person and the estate.  Such nominations are, of course, subject to court approval.

Deciding When a Living Trust Is Appropriate

This is an interesting article on when a living trust should be utilized.  I think there's a tendency to view the "living trust or not" analysis as science, not art.  However, while it would be nice to be able to say "everyone with an estate worth over $X needs a living trust," that's just not the case.  For instance, I can envision a scenario where a person with $1 million doesn't need a trust, just as I can envision a scenario where a person with a $100,000 estate does need a trust. 

When advising clients on this question, I try to be pragmatic, and explain how both the estate planning and the probate processes will work. 

On the estate planning side, I talk a lot about how establishing a living trust is a two-step process: (1) signing the document and (2) funding the trust.   If a client isn't comfortable with funding the trust (by changing title and beneficiary designations for his or her assets), then a living trust is never going to work for that client.  Similarly, if a client's #1 goal is to make certain that his or her children aren't "burdened" with a lot of work after his or her death, then a living trust makes the most sense.

On the probate side, I talk with the client about how property should pass to the client's beneficiaries, particularly in light of each beneficiary's situation.  If a client has three grown children and three grown grandchildren, all of whom are very responsible with money, then maybe a simple Will will do the trick.  On the other hand, if one or more beneficiaries can't receive property outright (maybe the beneficiary is bad with money, or a drug addict, or will lose government benefits), then a living trust is essential, no matter what the client's net worth.