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On December 6, 2010, President Obama announced that he has reached a deal with Republicans regarding the estate tax and other Bush Tax Cuts:

Under the deal, the repeal of the estate tax in 2010 would not be extended.  The estate tax would be revived, but not as it is scheduled.

Under current law, if Congress reaches no agreement, the estate tax is scheduled to come back in 2011 at a top rate of 55% (60% in some cases) and an exemption of a mere $1 million for individuals.

Under the Obama-Republican deal, the estate tax would come back at a rate of 35% and with an exemption of $5 million for individuals.

The impact that the Obama estate tax deal would have on estate planning does not appear to be positive.

Estate planning: chilled further.

Many Americans do not have proper estate plans. According to a Lawyer.com survey from earlier this year, there has been a drop in estate planning: only 35% of Americans now report having a will and only 21% have a trust.

Comments by estate planners indicate that the Obama estate tax deal would chill estate planning even further.

(1) Joshua Rubenstein (head of the estate and trust practice at Katten Muchin Rosenman LLP), said that without details it is hard to determine how estate planning would be impacted. But he added, “I would guess that having an estate tax rate equal to the income tax rate will discourage estate planning. Usually people gift if the gift tax and income tax on the carry over basis is less than the estate tax. Having a transfer tax equal to income tax rates will likely make hoarding cheaper.”

Rubenstein further explains, “If the gift tax stays 35% as well, that should cool substantially the rush to pay 35% at year end to save 55% some day when now you might be facing only a 35% estate tax some day.”

For more on the year-end rush to make gifts and how a proposal by Senator Baucus would chill it, see Ashlea Ebeling, Estate And Gift Tax Bombshell (The Best Revenge).

(2) Martin Shenkman thinks that that a lower estate tax rate and a higher exemption might lead more people to rely on do-it-yourself estate planning:

If taxpayers are given a comfort level that a $3.5 million to $5 million estate tax exclusion is permanent, most taxpayers will likely resort to on line self-help will preparation software, or frequent living trust mills or other cheap “estate planning” options with even greater frequency than before. After all, the complexity of the estate tax won’t affect them. . . .

Too few general practice attorneys or consumers begin to understand that estate tax is but one of many complex but vital matters estate planners address.

(3) In Obama and GOP Agree on Estate Tax: Winners and Losers, Scott R. Zucker (attorney, licensed in Virginia, Maryland and Pennsylvania) writes that those without wills (and estate planning lawyers) will be losers. He explains, “There is a prevalent myth that only the wealthy need estate planning services. Many people will see the new $5 million exemption level and be even less inclined to get a will.”

Continue reading: Obama Estate Tax Deal Would Chill Estate Planning

On December 6, 2010, President Obama announced that he has reached a deal with Republicans regarding the estate tax and other Bush Tax Cuts.

Under the deal, the repeal of the estate tax in 2010 would not be extended.  The estate tax would be revived, but not as it is scheduled.

Under current law, if Congress reaches no agreement, the estate tax is scheduled to come back in 2011 at a top rate of 55% (60% in some cases) and an exemption of a mere $1 million for individuals.

Under the Obama-Republican deal, the estate tax would come back at a rate of 35% and with an exemption of $5 million for individuals.

The object is to keep assets in the qualified plan or IRA and defer tax as long as possible. To do this you delay distributions by the owner and name beneficiaries who qualify for extended payment or who can roll over the benefits to their own IRAs and defer distribution even longer. In some cases the plan assets will have to be withdrawn for living expenses and tax deferral is not the most important thing.

Qualified retirement plans and IRAs turn capital gain into ordinary income and make it impossible to take advantage of stepped up basis on death so you should consider:

a) What is age of client?

b) What type of income do they get on plan assets?

c) Maybe they should not contribute any more.

d) Maybe they should start withdrawing from the plan rather than using other assets which are generating capital gain during their life.

Any planning for these interests must consider:

a) All distributions from an IRA or qualified plan are ordinary income and the plan interest or IRA is subject to estate tax on its fair market value on the date of death or the alternate valuation date.

b) Retirement plan interests cannot be given away irrevocably because of the anti-alienation rules under ERISA. Therefore they are not useful for gifting strategies.

c) Retirement plan benefits are Section 691 income in respect of a decedent so the beneficiary does not receive a stepped up basis on death.

(i) The beneficiary gets a deduction for the estate tax generated by the interest. The deduction is not subject to the 2% of adjusted gross income limitation. Section 67(b)(7).

d) The generation skipping transfer tax (GST) applies to interests passing to beneficiaries assigned to at least two generations below the owner. The exemption is $1,500,000 through 2003, $2 million in 2006-2008 and $3.5 million in 2009.

(i) There is an income tax deduction for GST taxes under Section 691(c)(3).

e) Distributions to the owner before age 59-1/2, except in limited instances, are subject to a 10% penalty.

There are minimum distribution rules – the tax shelter cannot last forever. There are 2 sets of rules. One for distributions during the owner’s life and one for distributions after the owner’s death.
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This allows the deductible gift to the surviving spouse to be made in trust so a trustee can manage the investments. The tax law provides that the gift, while not absolute, still qualifies for the marital deduction if the spouse must get all the income and has the power to say who gets the money remaining in the trust at his or her death. This is usually used together with a family or credit shelter trust which takes advantage of the credit to pass $3,500,000 tax free. Remember the spouse can get all the income from that trust too, but cannot have the power to say who gets the remaining assets of the family trust on his or her death. That power would cause the family trust assets to be in the surviving spouse’s taxable estate.

NOTE: There currently is no Federal or state estate tax or generation skipping tax. The gift tax is still in effect. Whether or not the estate and generation skipping taxes will be reinstated this year is not known. Many people expect that they will be reinstated, but what will happen is not known. What the rates and exemptions will be if the taxes are reinstated is also not known. Click here for more.

Contact Chicago estate tax lawyer Don Thompson for help with a marital deduction trust in Illinois.

It’s exactly what it sounds like.

There are a variety of bank accounts which pass on death to a named survivor. During the life of the owner of the account the survivor has no rights. That is, the survivor cannot withdraw funds from the account like a joint tenant could. A will does not affect these accounts. They pass to the person designated in the bank records regardless of any will or probate court action. Whether or not such an account has been created depends on the agreement with the bank. Sometimes these accounts are called “Pay on death” accounts. Sometimes they are called “Totten Trusts”. Sometimes the account ownership designation merely says “X in trust for Y”, although there is no trust agreement.

For further information on pay on death accounts or to handle other matters related to your Illinois Estate contact Chicago Estate Planning Attorney Donald Thompson.

Estate Planning starts with an analysis of —

• Your assets
• Your liabilities
• Your present and future needs and desires
• The present and future needs and desires of your family and relatives
• Your and their future prospects.

Estate planning consists of planning and structuring your assets to meet those needs and desires. Some of the considerations are –

• Determining who is to get your assets
• Naming the executor of your will
• Naming the trustee of any trusts you may create
• Naming the guardian of your children, if both you and your spouse die
• Naming someone who will care for you and your assets if you are disabled.

Wealth building

• Providing for your children’s education
• Providing insurance coverage for illness, disability or death
• Providing for investment and management of your assets after your death
• Tax planning to reduce income and estate taxes
• Avoiding probate.

Estate planning often involves lifetime gifts to children. This gets appreciation on the assets out of the parents' estates. This was also done in the past to shift income to children who were usually in a lower tax bracket.

Now a child under 14 pays tax at the parents' highest marginal tax rate on the child's unearned income over $1600 if that would be higher than the child's tax.

Call attorney Don Thompson at 312-782-0844 for all Chicago Estate Planning matters.

Life insurance plays a variety of roles in estate planning. The first is to provide a fund to support the surviving family of a breadwinner who dies young before building an estate. Another is to provide cash in large estates to pay estate taxes so other assets such as a family business or farm do not have to be sold or borrowed against.

Life insurance can also be used to avoid the estate tax. A life insurance policy, like any other asset, can be given away. If it is given away it is no longer in the taxable estate of the person who gave it. Yet it will provide the face value and perhaps more at the death of the person who gave it away. And it can be given away when it has little value so there is no gift tax. It is the ideal asset to give away since there is usually no use for it until the insured owner dies. And at that time he or she has little use for the proceeds. There are sometimes reasons not to give away a policy though. When a policy is given away the insured can no longer borrow against the policy. Nor can the insured changed the beneficiaries. Giving away the policy involves giving away these rights. Just changing the beneficiary is not the same as giving away the policy.

Life insurance proceeds are usually income tax-free.

Federal legislation passed in 2006 has turned many former procrastinators into pre-planners. The Deficit Reduction Act, signed into law by President Bush in February 2006, extends Medicaid’s "look-back" period from three years to five. "Look-back" is the term for the period of time during which financial transactions of a Medicaid applicant/recipient are subject to review in determining whether or not that person is eligible for Medicaid (called MaineCare in Maine).

Larry Raymond has been with the Lewiston Law firm of Isaacson & Raymond for over 50 years. He isn’t surprised by the increased interest in planning for the future, "I’ll have three or four clients a week call or stop by inquiring about what steps they should take."

Under the current law, when an elder applies for MaineCare, any gift the elder gave to a child within the 60 preceding months will make it more difficult for the elder to qualify for MaineCare. According to Raymond, the word has gone out and many people are asking the poignant questions earlier, "Last minute planning is now more difficult than it used to be. Fortunately most people are aware of the changes and are taking appropriate steps."

The state will not let you just give away your property or your money to qualify for Medicaid. Gifts or transfers for less than fair market value that are made during the "look back" period may cause a delay in their eligibility. For gifts made before February 8, 2006, the ineligibility period begins when the gift was made. For gifts made on or after February 8, 2006, the ineligibility period begins when the applicant enters a nursing home and is otherwise eligible for MaineCare except for having made the gift.

Separate from the MaineCare eligibility issue, one of the most common questions that Raymond hears has to do with homes or land, "People always want to know if they should put their home in their kids’ names. By asking the client to consider five situations, Raymond says they are able to come to the conclusion on their own. "Do you want your child to own your home if: (1) they get divorced or (2) go into bankruptcy or (3) get sued or (4) pass away before you or (5) have a bad habit you don’t know about (an example could be gambling)?"

Raymond says it is important to remember that the Federal Estate Tax threshold currently stands at $2 million dollars and increases to $3.5 million dollars in 2009. In Maine that threshold is currently $1 million dollars.

Raymond says, "It may be a bit of a cliché, but it is never too early to start planning."
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