Maryland Authorizes Pet Trusts

Published
by
michael
on April 18, 2009
in Estate Planning
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On April 14, 2009, Maryland’s Governor O’Malley signed into law House Bill 149 which authorizes statutory pet trusts.

Professor Berry gives us some of the key features of the statute in this post:

  • The animal must be alive during the settlor’s lifetime.  [Est. & Trusts § 14-112(A)]
  • The trust ends at the death of the last animal covered by the trust.  [§ 14-112(B)]
  • If the settlor did not appoint someone to enforce the trust, the court may appointed an enforcer.  [§ 14-112(C)(1)]
  • A person with an interest in the welfare of the animal may ask the court to appoint an enforce or to remove an enforcer who is not doing his/her job.  [§ 14-112(C)(2)]
  • Trust property may be used only for the pet’s benefit unless the court finds that the value of the trust property is excessive.  [§ 14-112(D)(1)]
  • If the settlor did not provide express directions, excess trust property passes to the settlor (if still alive) or to the settlor’s successors in interest if the settlor is dead.  [§ 14-112(D)(2)]
  • These provisions apply only to pet trusts created on or after October 1, 2009.  [H.B. 149, § 2]
  • The Rule Against Perpetutities does not apply to pet trusts.  [§ 110102(b)(12)]

Thanks again Professor.  How did I ever bog without you?!

To Restate Or Not To Restate – That Is The Question

Published
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michael
on April 18, 2009
in Estate Litigation, Estate Planning and Recent Cases worth noting
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Professor Berry tangentially raises the above question in a post today on the Wills, Trusts & Estates Prof Blog via his telling of the case of Soefje v. Jones, 270 S.W.3d 617 (Tex. App.—San Antonio 2008, no pet. h.).

The case pits brother against sister in a dispute over the meaning of a trust amendment to dad’s trust.  “Brother argued that the amendment only added to the property to which Sister was entitled under the original trust instrument but left the property to which he was entitled intact.  On the other hand, Daughter claimed that the amendment revoked the entire property distribution provided for in the original trust causing property originally given to Brother to pass under the trust’s residuary clause permitting her to share in that property.” Sounds like brother was being reasonable, sister was being greedy.  But I haven’t read the trust yet folks so shelve the mail bombs.

Daughter won.  Brother appealed.  Appellate Court reversed:

The court began its analysis by recognizing that a trust amendment does not revoke a provision of the original trust “unless the words used in the amendment clearly show the [settlor’s] intent to revoke the trust.”  Soefje at 629.  The court studied the trust and the amendment and held as a matter of law that the instruments are unambiguous.  The amendment merely added to Sister’s entitlement by giving her certain properties to which Brother was originally entitled under the original trust.  The amendment did not act to revoke gifts of other property to Brother.

The case is interesting in and of itself but its more useful as a tale of the trouble with amending one’s trust.  If you want to substitute a fiduciary, amend how qualified assets are handled, even expand/reduce the fiduciary’s authority, an amendment can be fine.  But they’re tricky.  They muddle the Grantor’s original intent which is drawn from the whole of the original document, its one more piece of paper for you to lose as the years pass and they’re usually more expensive than the change alone is worth.

The question therefore is, do you amend the trust?  Or do you restate the trust in its entirety?

More often, I’m a fan of the latter option.  The sanctity of the single document is maintained and you lessen – to the extent possible – the likelihood of interpretive litigation.  Also, believe it or not, the cost is about the same.

Gay marriage, by legislature, in Vermont

Published
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michael
on April 7, 2009
in Estate Planning
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Someone asked me the other day:  Michael, why are so many of your blog posts about gay marriage?”  “Well”, I replied, “Because tyranny, like hell, is not easily conquered.”

I know, I’m pretty awesome right?!  Well, in truth, I am only that which Thomas Paine made me.

Seriously though, the issue is a huge one for us estate planners.  What we are forced to do now for non-traditional families is burdensome, expensive and oftentimes not guaranteed to work.  Granting a marriage right with gender-neutral language would make our jobs much easier…  Which Vermont did today:

From The Volokh Conspiracy:

Nine years after it became the first state to approve civil unions, Vermont becomes the first state to enact gay marriage legislatively. With just one vote to spare, the Vermont state legislature has overridden the governor’s veto of a gay marriage bill. The state house voted 100-49 and the state senate voted 23-5.

Sec. 3. 15 V.S.A. § 8 is amended to read:

§ 8. MARRIAGE DEFINITION

Marriage is the legally recognized union of one man and one woman two people. Gender-specific terms relating to the marital relationship or familial relationships, including without limitation “spouse,” “family,” “marriage,” “immediate family,” “dependent,” “next of kin,” “bride,” “groom,” “husband,” “wife,” “widow,” and “widower,” shall be construed to be gender-neutral for all purposes throughout the law, whether in the context of statute, administrative or court rule, policy, common law, or any other source of civil law.

This is making the rounds out there in the blogo-netcom…  I’m sure I’m not the first.

The Estate Tax = Smart (The Universe In Balance)

Published
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michael
on April 6, 2009
in Estate Planning
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Well, maybe not the universe, but at least this blog.

Balancing my earlier post on why the estate tax is bad comes this April Fools Day Editorial in the NYT:  The Forgotten Rich. 

I don’t think the rich have been entirely forgotten recently even though many of them wish they had been, but the article makes some strong points.  Speaking to the recent proposal by Senator Blanche Lincoln, Democrat of Arkansas, and Senator Jon Kyl, Republican of Arizona, the author derides what s/he says the point of their proposal:  America’s wealthiest families need help. Now

The two senators plan to propose an amendment to deeply cut estate taxes for the fraction of the top 1 percent of the population still subject to those levies.

The proverbial millionaires next door — the plumbers, contractors and accountants who amass substantial wealth through hard work and modest living — are not the intended beneficiaries of the proposed cut. The Obama budget already takes care of them, because it retains today’s law, which imposes the estate tax only on couples with property worth more than $7 million, or individuals with property worth more than $3.5 million. That means 99.8 percent of estates will never — ever — pay a penny of estate tax.

The heirs of the remaining 0.2 percent of estates are who Ms. Lincoln and Mr. Kyl are so worried about. Their amendment would increase to $10 million the level at which the estate tax kicks in. It would also lower the top estate-tax rate to 35 percent from 45 percent.

$10 million sounds high.  We’ve been talking around the office about $5 million as a reasonable exemption, but $20 million per married couple sounds high and starts to feel like we’re ratchening up the exemption at a geometric rate.  Their proposal seems an obvious foot-in-the-door for the wealthiest (and the loudest and fewest) of their constituents.

In addition to creating the false impression that the estate tax eventually hits everyone — by mislabeling it a “death tax” — opponents routinely denounce the 45 percent top tax rate as confiscatory. In fact, the rate applies only to the portion of the estate that exceeds the exemption. As a result, even estates worth more than $20 million end up paying only about 20 percent in taxes.

Another misleading argument is that the estate tax represents double taxation. In truth, much of the wealth that is taxed at death has never been taxed before. That’s because such wealth is often accrued in the form of capital gains on stocks, real estate and other investments. Capital gains are not taxed until an asset is sold. Obviously, if someone dies owning an asset, he or she never sold it and thus never paid tax on the gain.

If those arguments aren’t enough to stop the Lincoln-Kyl show, lawmakers should consider this: The estate tax creates a big incentive for high-end philanthropy, because charitable bequests are exempt.

The latter point cannot be ignored.  Charities should be all over this but their lobby is oddly silent.

The second point is observably verifiable, at least in my practice.  The vast majority of the assets of an individual’s gross taxable estate that I see on a daily basis have not yet been taxed.  The assets are often present in a qualified plan of some sort that were contributed pre-tax, are unrealized gains on marketable securities or are present in real property.  The obvious rebuttal to saying the latter two asset classes haven’t been taxed is by saying that those assets were purchased with post-tax dollars and taxing those asset’s values at death is double-taxation.  And that may be true, however, what is not taxed is the gain on those investments until they are sold.  You may have  purchased the stock at $50/share but when you pass away and its at $60 having split 3 or 4 times you haven’t paid a tx on any of those gains; gains which may have doubled or tripled the value of the stock.  The same holds true for real estate.  And when both assets are passed to your beneficiaries, they enjoy a stepped up basis so the assets then have truly never been taxed by that recipient.

Senate Passes Amendment to Reduce Estate Tax & Raise Exemption

Published
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michael
on April 3, 2009
in Estate Planning
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Lots of movement on this in the last week.

This morning Brad Wrightsel wrote here about the Senate having passed “a nonbinding but symbolically important amendment” rasing the exemption to $5 million and lowering the rate to 35%.

The Hill, The New York Times, Fox News and the Wall Street Journal all carry their own versions of the story, most of which focus on the “larger” story (get it!?) of the overall budget itself.

From The Hill:

One key fight was settled early in the evening, when senators passed an amendment increasing the estate tax exemption to up to $10 million, a move that seeks to force Democrats to cut spending from their budget. Couples currently enjoy only a $7 million exemption from the estate tax, called the “death tax” by Republicans because it applies to the transfer of property of the deceased.

The amendment increases the exemption for individuals from $3.5 million to $5 million, and it cuts the estate tax rate from 45 percent to 35 percent. The amendment, proposed by Sens. Blanche Lincoln (D-Ark.) and Jon Kyl (R-Ariz.), passed 51-48 with bipartisan support. All 41 Republicans supported it, along with a group of centrist Democrats.

Despite all of the attention, however, the estate tax relief proposal is unlikely to survive conference talks since those will include House Democrats who have not backed the idea previously.

From The NYT:

Among the amendments that won Senate approval was a bipartisan proposal that would raise the estate tax exemption by $1.5 million, to a total of $5 million, and reduce the tax’s maximum rate by 10 percentage points, to 35 percent.

Fox News (as usual) has their facts wrong, but its the most entertaining read:

Under Obama’s plan, the tax would have expired in 2010 and remained at its 2009 level — meaning the government would get 45 percent of a dead person’s estate valued over $3.5 million.

The amendment would reduce the estate tax rate to 35 percent and increase the exemption to $5 million [per person.]

Busy morning!

Iowa Supreme Court Strikes Down Gay Marriage Ban

Published
by
michael
on April 3, 2009
in Estate Litigation, Estate Planning, Insurance and Recent Cases worth noting
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This is what happens when I schedule early morning meetings…  Everyone else gets the good stories out first.

The ABA Journal, The Volokh Conspiracy and Professor Berry’s ever-timely Wills, Trusts & Estates Prof Blog all wrote this morning to report on the Iowa Supreme Court striking down the state’s ban on same-sex marriages.  The decision was unanimous.

The court ruled the ban violates the equal protection clause of the Iowa Constitution, according to the Associated Press and the Des Moines Register.

“Our responsibility … is to protect constitutional rights of individuals from legislative enactments that have denied those rights, even when the rights have not yet been broadly accepted, were at one time unimagined, or challenge a deeply ingrained practice or law viewed to be impervious to the passage of time,” the opinion (PDF) said.

I added the emphasis there in the last sentence because it reminded of Lawrence v Texas overruling Bowers v Hardwick.  Bowers had been invoked more times than I care to count for its “deeply rooted in our Nations history” standard/B.S., that had, until the Lawrence case, stood as an insurmountable barrier to the equal rights of more than the just the GLBT community.

“We are firmly convinced the exclusion of gay and lesbian people from the institution of civil marriage does not substantially further any important governmental objective. The legislature has excluded a historically disfavored class of persons from a supremely important civil institution without a constitutionally sufficient justification. There is no material fact, genuinely in dispute, that can affect this determination” the Court stated.

The Court stated further.

The court stated that “a statute inconsistent with the Iowa constitution must be declared void even though it may be supported by strong and deep-seated traditional beliefs and popular opinion.”

Also interesting, according this story at the New York Times, is Iowa’s lack of a residency standard for marriage licenses…  I think you see where this is going.  Have you ever seen a Pride Parade adjacent to a cornfield?  Neither have I.  But I bet its pretty cool.

Above The Law writes:

Not surprisingly, a spokesperson for the Iowa Family Policy Center was deeply sadden [sic] that more people will be allowed to get married:

Bryan English, spokesman for the Iowa Family Policy Center, a conservative group that opposes same-sex marriage, said many Iowans are disappointed with the ruling and don’t want the courts to decide the issue.

“I would say the mood is one of mourning right now in a lot of ways, and yet the first thing we did after internalizing the decision was to walk across the street and begin the process of lobbying our legislators to let the people of Iowa vote,” Mr. English said. “This is an issue that will define (lawmakers’) leadership. This is not a side issue.”

Iowa is now the first Midwestern state, and the fourth nationwide, to allow same-sex marriages.

The Estate Tax = Stupid

Published
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michael
on April 2, 2009
in Estate Planning
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Professor Beyer beat me to it…  He found this great article on why the estate tax is dumb/evil.  He credits Patrick Sylvester of The Sylvester Law Firm, PC, and its really so good that I had to thank Mr. Sylvester in this post as well.  The Good Professor excerpts the following and I thought it appropriate to repeat the same on this blog.

So, thank you Mr. Sylvester!  And thank you again Professor!

In most cases, people who inherit wealth are lucky by an accident of birth and really don’t “deserve” their inheritance any more than people who don’t inherit wealth. After all, few of us get to choose our parents. It’s also arguable that inherited wealth sometimes induces slothfulness and overindulgence. But the facts that beneficiaries of inheritances are just lucky and that the actual inheritance may make beneficiaries less productive don’t justify having an estate tax.

These same observations about serendipitous birth can be made for intelligence, education, attractiveness, health, size, gender, disposition, race, etc. And yet no one would suggest that the government should remove any portion of these attributes from people simply because they came from their parents. Surely we have not moved into Kurt Vonnegut’s world of Harrison Bergeron. * * *
Advocates of the estate tax argue that such a tax will reduce the concentrations of wealth in a few families, but there is little evidence to suggest that the estate tax has much, if any, impact on the distribution of wealth. To see the silliness of using the estate tax as a tool to redistribute wealth, realize that those who die and leave estates would be taxed just as much if they bequeathed their money to poor people as they would if they left their money to rich people. If the objective were to redistribute, surely, an inheritance tax (a tax on the recipients) would make far more sense than an estate tax. * * *

Clearly, taxing estates at death will induce people who wish to leave estates to future generations to leave smaller estates and to find ways to avoid estate taxes. On a conceptual level, it makes no sense to tax estates at death.

Study after study finds that the estate tax significantly reduces the size of estates and, as an added consequence, reduces the nation’s capital stock and income. * * *

Today in America you can take your after-tax income and go to Las Vegas and carouse, gamble, drink and smoke, and as far as our government is concerned that’s just fine. But if you take that same after-tax income and leave it to your children and grandchildren, the government will tax that after-tax income one additional time at rates up to 55%. I especially like an oft-quoted line from Joseph Stiglitz and David L. Bevan, who wrote in the Greek Economic Review, “Of course, prohibitively high inheritance tax rates generate no revenue; they simply force the individual to consume his income during his lifetime.” * * *

The estate tax in and of itself causes people to waste resources.

Estate Tax News: Proposed Exemption Fixed at $3.5 Million

Published
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michael
on March 28, 2009
in Estate Planning
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On 3/26, Senate Finance Committee Chairman Max Baucus (D-Mont.):

announced legislation that would make existing tax breaks permanent for working families and individuals including the child tax credit, marriage penalty relief, and lower middle-income tax rates among other provisions. The measures were originally passed as part of tax legislation in 2001 and 2003, but are set to expire in 2010. Baucus unveiled his proposal after a Finance Committee hearing today that examined the affect of the current economy and the U.S. tax code on America’s middle class.

“Today we’re offering a piece of certainty during an uncertain time for millions of hardworking, honest Americans. These measures are not excessive or outrageous, but timely and targeted, and will build on earlier efforts to stabilize the economy,” said Baucus. “By guaranteeing a little extra cash in the pocket of working moms and dads, and by making sure that the AMT and the estate tax can move with the economy, we avoid sweeping tax increases for millions of American families. By promising spouses tax fairness in marriage, giving help to those helping others through adoption, and by giving lower-wage workers confidence at a critical time, we can restore our footing, and begin to climb back to a position of national strength and economic security.” 

The estate tax is the biggest piece of this particular legislation, in my opinion anyways:  Rather than being repealed in 2010 (as its set to do under current law), the estate tax exemption would sit at $3.5 million and be indexed for inflation in $10,000/year increments starting in 2011.  The tax rate would be fixed at 45% – the same as it is now.  The biggest news though is the “marital deduction portability.”  Under the proposed law, when one spouse passes away, their estate can pass to the surviving spouse without the need for a credit shelter trust.  If the surviving spouse passes away with an estate larger than the then applicable individual exemption amount, they can elect to use the “aggregate deceased spousal unused exclusion amount.”  The use of the first deceased spouse’s deduction requires an election on the tax return of the second to die and can be up to the full amount of the unused exemption.  Thus, $7 million can pass free of estate tax on the death of the second spouse.

Greg Herman-Giddens of the North Carolina Estate Planning Blog, wisely writes:

If this bill becomes law, the first tendency of many couples with [federally] taxable estates will be to revise their wills or trusts to do away with the credit-shelter (bypass) trusts.  However, there will still be compelling reasons to have such trusts.  With a credit-shelter trust, growth in the value of the assets is also protected from estate taxes, while that is not necessarily true if a couple relies on exemption portability.  In addition, the credit shelter (or marital) trust provides valuable protection from mismanagement, creditors, and future spouses.

Awesome Greg.  I couldn’t have said it better myself.

A full summary of the bill is below:

The Taxpayer Certainty and Relief Act of 2009

I. Permanent Middle Class Tax Relief

Individual Tax Rates. Current ordinary income tax rates are imposed at 10, 15, 25, 28, 33, and 35%. These tax rates expire at the end of 2010. The proposal would make permanent the 10, 25, and 28% tax rates. (The 15% tax rate is already permanent law.)

Capital Gains and Dividends. The proposal would make permanent the reduced tax rate on capital gains and dividends for taxpayers in the 10, 15, 25, and 28 percent brackets. The 2003 tax bill created a new tax rate of 15 percent (5 percent for low-and middle-income taxpayers, going to zero percent in 2008) for dividends. Prior to passage of this bill, dividends were taxed at ordinary income rates. The 2003 bill also reduced the capital gains tax rate from 20 percent (10 percent for low- and middle-income taxpayers) to 15 percent (5 percent for low- and middle-income taxpayers, going to zero percent in 2008). These reduced tax rates were originally set to expire at the end of 2008, but were extended until the end of 2010 in the “Tax Increase Prevention and Reconciliation Act of 2005″ (TIPRA).

Child Tax Credit.Generally, a taxpayer may claim the child tax credit to reduce income tax liability by up to $1,000 for each qualifying child under the age of 17. If the amount of a taxpayer’s child tax credit is greater than the amount of the taxpayer’s income tax liability, the taxpayer may receive a refund if the income threshold is met. The Economic Growth and Tax Relief Reconciliation Act of 2001 set the income threshold for child tax credit refundabilityat $10,000 (indexed). The American Recovery and Reinvestment Act decreased the threshold for the 2009 and 2010 tax years to $3,000. The proposal would make these changes to the child tax credit permanent.

Marriage Penalty. A “marriage penalty” exists when the combined tax liability of a married couple filing a joint return is greater than the sum of the tax liabilities of each individual computed as if they were not married. A “marriage bonus” exists when the exemption amounts and rate brackets are larger for the joint returns filed by married couples than for singles’ returns. As part of the 2001 tax cuts, the standard deduction for married filers was scheduled to increase annually until 2009. In addition, the bill eliminated the marriage penalty in the 15% tax bracket and for the earned income tax credit. The marriage penalty relief expires on December 31, 2010. The proposal would make the marriage penalty relief permanent.

Dependent and Child Care Credit.The dependent care credit allows a taxpayer a credit for paid child care expenses for qualifying children under the age of 13 and disabled dependents. The credit is 35% of eligible expenses. This rate decreases by 1% for each $2,000 of income above $15,000, but the rate never falls below 20%. Eligible expenses are limited to $3,000 for one child, and $6,000 for two or more children. (After 2010, the amount of eligible expenses returns to the pre-2001 amounts of $2,400 for one child and $4,800 for two or more. In addition, the 35% credit rate decreases to 30% and the income threshold decreases to $10,000.) The proposal would make 2009 law permanent.

Earned Income Tax Credit. The EITC is a refundable tax credit available to low wage workers. Because the credit is refundable, a taxpayer will receive a refund if the amount of the EITC is greater than the amount of the income tax liability or if no income tax liability exists. The American Recovery and Reinvestment Act increased the credit rate for taxpayers with three or more children from 40% to 45% and increased the phase out range for all married couples filing a joint return (regardless of the number of children) by $1,880. The proposal would make these changes permanent.

Adoption Credit and Adoption Assistance Programs. Current law allows a maximum adoption credit of $10,000 per eligible child and a maximum exclusion of $10,000 per eligible child. These benefits are phased-out for taxpayers with modified adjusted gross income in excess of certain dollar levels. These tax incentives go back to $5,000 per child ($6,000 for child with special needs) after 2010. The proposal would make 2009 law permanent.

II. Permanent Alternative Minimum Tax Fix

For the 2009 tax year, the American Recovery and Reinvestment Act provided a patch for the AMT, setting the exemption amount at $46,700 (individuals) and $70,950 (married filing jointly), and allowed the personal credits against the AMT. When this patch expires, the exemption amounts will return to $33,750 (individuals) and $45,000 (married filing jointly) and the personal credits will not be allowed against the AMT. The proposal would make the 2009 exemption levels permanent and index them for inflation. In addition, the proposal will permanently allow the personal credits against the AMT.

III. Permanent Estate Tax Relief

Under current law, U.S. citizens and residents must pay taxes on transfers of property both during life and at death. These taxes are due under three separate tax systems: the estate tax, the generation-transfer skipping tax, and the gift tax. Currently, the top tax rate for all three taxes is 45%. Both the estate and generation-skipping transfer taxes currently have a $3.5 million exemption for individuals ($7 million for couples). The gift tax has an exemption of $1 million ($2 million for couples). For the 2010 tax year, the estate and generation skipping transfer taxes are repealed. In the same year, the gift tax rate will fall to 35%. In 2011, the estate, generation skipping transfer, and gift taxes are scheduled to revert back to pre-2001 levels, with an exemption of $1 million, a 55% rate, and a 5% surtax on large estates.

Thanks to this story at Scottrade for the great detail.

Reverse Mortgages After The Obama Stimulus – More Options

Published
by
michael
on March 26, 2009
in Uncategorized
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I wrote previously about reverse mortgages and their uses, but this seemed worth commenting on.  Looks like the stimulus package has beefed up the loan amounts available and capped some of the fees:

Reverse mortgages have been around for a while, but because of recent changes now look more appealing. Last month, the economic stimulus package raised the maximum loan amount to $625,500 from $417,000, at least for this year.

New federal guidelines, meanwhile, expand the reach of the loans and make them slightly more affordable. They cap the fees, which had drawn many complaints for their size and even allow borrowers to use a reverse mortgage to buy a primary residence.

Finally some good news for older people suffering the “triple whammy of declining income, falling home values and dwindling savings from Wall Street’s meltdown.”

These things are complex though and the right set of circumstances must be met before a reverse mortgage is advisable.  It is usually better (and easier/cheaper) to downsize or try to refinance your existing  mortgage.  Your best bet?  Contact a skilled estate planning attorney and let them analyze your situation because some amount of thought should go into this by someone who does this stuff for a living.

Oops…

Published
by
michael
on March 19, 2009
in Uncategorized
. 0 Comments

Big ups to Saul Elnadav of Vishnick McGovern Milizio LLP!  Saul is the pulbisher of the New York Trusts & Estates Law Blog.  Saul wrote me last night to let me know that my RSS feed wasn’t working properly, which I was completely unaware of.

I think the mix-up happened when I linked all of my feeds (RSS, Atom, XML, etc.) to my FeedBurner account so I could manage everything from one place, but I guess I screwed up.  So, despite my flurry of posts these last 60 days or so, my feed wasn’t being published at all.  Oops.

Problem solved though.  So now, thanks to Saul, you can again revel in my glorious wit and inspiration.

Thanks Saul.  And keep up the great work on your site as well!