Dedon on Estate Planning

Estate Tax Legislation: Latest Developments

As 2011 looms ahead, this past week illustrated just how far we are from estate tax legislation.

On one hand, the Daily Tax Report quoted from Senator Charles Grassley's June 16th Senate floor speech, in which Grassley lamented the return in 2011 of only a $1 million exemption amount and 55% estate tax rates. Grassley favors total repeal, but realistically would accept a compromise that would increase exemption amounts to $5 million ($10 million per married couple who plan properly) and a maximum 35% estate tax rate.

On the other hand, the New York Post reported that Senate Majority Leader Harry Reid said that he will not support a House Bill providing for a $3.5 million exemption amount and a 45% estate tax rate, much less the higher exemption amount that Grassley desires. According to Reid, there are 40 Senate Democrats that believe a $3.5 exemption amount is too generous. The Post quoted a spokesman for Senator Sheldon Whitehouse, Democrat from Rhode Island, as saying "at this time of record deficits...Congress cannot afford to let the estates of millionaires and billionaires go untaxed."

Where does that leave us? Incredibly, with increased odds that there will be only a $1 million exemption amount in 2011, much to the chagrin of most "experts" who predicted that, at the least, a $3.5 million exemption amount would be adopted for 2010 and beyond. (Currently there is no estate tax for only this year, unless Congress chooses to retroactively reinstate it.) November elections could alter the legislative landscape, but how much?

In the meantime, as Congress and the Administration seek revenue, the dismal news continues for the families of wealthy decedents: proposals supported by both the President and the House are taking aim on tried and true solutions for estate tax savings. One such curtailment proceeding to the Senate for consideration is the elimination of two-year rolling GRATS, a strategy allowing taxpayers to pass assets to their children on a tax-advantaged basis. (You can see this Blog for several Posts regarding GRATS.) Although GRATS would still be allowed, their advantages would be largely gutted by requiring at least a 10-year term.

Estate Tax: Who Pays Among the Beneficiaries?

You are proud of yourself for finally finishing your estate plan. You decided who will receive your assets upon your death; you have Wills, Powers of Attorneys and Medical Directives; you also have Revocable Trusts to avoid probate. If you are married, you and your spouse each have credit trusts and marital trusts to protect from estate tax as much as the law allows at the first and second deaths. You have trusts for your children so they cannot spend the money all at once, and these trusts also are designed to protect the children’s assets in the event of divorce. Also, you have selected your Executors, Trustees, and the Guardians for your minor children. Finally, you coordinated the beneficiary designations and the titling of your assets so the Revocable Trusts are funded and the assets are balanced for estate tax purposes. You can relax, right? You are done? Perhaps not as a recent Wisconsin case illustrates.

In J. Sheppard Est., recently decided by the Wisconsin Supreme Court and reported by CCH at 2010-1USTC, Para 60,593, the decedent left $3.8 million by beneficiary designation to his goddaughter. The Estate Executor sought to collect the allocable share of estate taxes from the goddaughter. Because Wisconsin does not have a tax apportionment statute (and for other technical reasons outside the scope of this Post), the court held that the goddaughter was entitled to the entire $3.8 million free of estate tax.

In contrast, Virginia does have an apportionment statute, so assuming the Will is silent, the Executor could have collected an allocable share of the estate taxes on the $3.8 million. The moral of the story is that, in drafting an estate plan, it is important to focus on the various issues mentioned in paragraph one above, and the payment of estate taxes. The issues pertaining to the payment of estate taxes include how the taxes are divided among the beneficiaries and the sources of the payment. You should specifically spell out your intentions in your estate planning documents and not leave it up to state law.

What do John Wooden and Bill Walton have to do with Estate Planning?

Coach John Wooden died last week at age 99, having lived a full and rich life. According to Bill Walton, Coach Wooden "never let us forget what he learned from his two favorite teachers, Abraham Lincoln and Mother Theresa, that a life not lived for others is not a life." Coach Wooden’s positive influence on those he touched would have impressed even President Lincoln and Mother Theresa.

In commenting on Coach Wooden, Walton also had this to say:

"John Wooden represents the conquest of substance over hype, the triumph of achievement over erratic flailing, the conquest of discipline over gambling, and the triumph of executing an organized plan over hoping that you’ll be lucky, hot or in the zone.

"John Wooden also represents the conquest of sacrifice, hard work and commitment to achievement over the pipe dream that someone will just give you something, or that you can take a pill or turn a key to get what you want."

What do Walton’s comments have to do with estate planning? Nothing really, I just admire Coach Wooden and Walton’s comments. (The fact that Walton was a role player on the greatest professional basketball team of all-time, the 1985-86 Boston Celtics, in the waning days of his Hall of Fame career, doesn’t hurt.) However, since this is an estate planning Blog, the metaphor is the following:

If you are waiting for Congress to solve your estate problem by eliminating the estate tax – the "pipe dream" that there will be a magic "pill" - it is not going to happen. In 2011, there will be estate tax, we just don’t know the exemption amount. It could be $1 million, $3.5 million, or $5 million. But you do need "an organized plan over hoping that you’ll be lucky." Without "commitment" to a plan your family will be the losers.