R.C. Lim, Attorney and Counselor at Law

Elderly Gay Couple In Sonoma County Wrongfully Separated

For those gay couples looking for a cautionary tale of what can go wrong as you get older, the recent story of an elderly couple who were wrongfully separated and deprived of their assets is chilling. In brief, the fall of an eighty year old man led county employees to visit the home and admit the couple. The county employees admitted the couple to different nursing homes. In the case of the younger partner, it was entirely against his will. The older partner who had fallen spent the final two months of his life alone and away from his partner of twenty years. Despite the fact that documents had been prepared giving each other powers of attorney, healthcare directives, and wills, county officials went into court claiming that the two longtime partners were just roommates and asked for a court order to sell their stuff.

This couple evidently had already done the estate planning to prepare themselves for such an event. Worse still, these ugly acts were committed by county employees under the color of law. It shows in yet another glaring fashion why prohibiting gay marriage is wrong.

2010 Estate Tax 101

Okay, the really quite odd thing happened and Congress did not get around to changing the estate tax last year. Hence, there is no estate tax for those who die this year regardless of the size of the estate: millions, hundreds of millions, or even billions….

The complication comes in that the basis step-up that most receive on death is no longer available. This means that beneficiaries will usually inherit the tax basis of any asset they receive from a decedent. This further means that when and if they go to sell that asset, they will owe capital gains tax on any increase in value. Since the assets in questions — homes, IRA accounts, etcetera — that beneficiaries receive have usually appreciated over the decadent’s life, this means that taxes will be owed by most estates.

The net effect will be to increase the tax on the smaller to mid-size estate, while almost entirely removing the tax for large and exceptionally large estates, a truly perverse outcome. Worse still, it’s worth remembering that most brokerages do not keep or report records to the IRS on purchase prices of securities. In the absence of knowing a precise number, the IRS typically assumes the value to be zero and capital gains taxes are presumed to be owed on the entire amount from the sale of any securities. The problem here is that it is often the case that the executors and administrators who are rummaging through the old records cannot reconstruct the purchase prices either. This leaves those in charge with the difficult task of making up a number based on the surrounding or circumstances or simply paying the tax on the entire amount. Congress has certainly created a real mess by allowing the Bush’s repeal of the estate tax to go into effect.

California Homestead Exemption Increases By $25,000

The California homestead exemption protects a fixed amount of the equity in a person’s home from that person’s creditors. The means that judgement creditors cannot foreclosure on a property unless the person’s equity exceeds the amount permitted by state law. Under current California law, the base exemption is $50,000. If a person or a person’s s spouse resides in the home as a homestead, the amount rises to $75,000. For those over 65 years of age, disabled, or over 55 years of age with limited income, the amount jumps to $150,000.

On January 1, 2010, California will increase these amounts across the board by $25,000. (CA Assembly Bill 1046.) A client of mine mentioned that California to me in a hazy way, and I foolishly assumed that he was accidentally referring to the currently higher limit of $150,000 for the aged.  While this news did not pass unnoticed on the blogosphere, newspaper citations on the change are scant. I guess the newspapers assume (quite rightly) that their readership does not need to be reminded in any way of how much equity they’ve lost in their houses.

New Estate Tax Passes House

It seems that the House has already passed a bill that taxes estates over $3.5 million at 45%.

Point - Counterpoint

A NY Times Op-Ed piece by Ray Madoff argues that there needs to be an exemption to any new estate tax for family farmers and small business owners.

Others disagree stating that it’s money that can scarcely be lost from the Treasury and that the exceptional amounts involved only include families with very large farm or business operations.

Since one of the complaints of the estate tax is that it distorts wealth distribution and encourages individuals to pursue diseconomy, this can scarcely be called a cure. Would Sam Walton’s children be permitted to take free of tax as heirs to a “family business”? On the other hand, what of a family farm in California that gainfully employs four or more heirs in comfortable but not extravagant lives? This is the complicated debate that awaits Congress after they finish bickering about Afghanistan, health care, and the environment.

The Big Question: Will the Estate Tax Disappear?

Now that it’s November and Congress is still putzing around in committee, the question of whether Congress will find enough time to pass a new estate tax bill is an open question.

As I have pointed out, failing to act will create a perverse incentive to die in 2010 so that an estate can pass tax free. Perhaps the legislators have a hard time grasping that tax policy could affect such an important decision, but I have had heard enough sick and elderly joke about this to know that it is only some people peoples’ minds.

Failing to act will also make hay of the current system that balances the bite of a steep estate tax (45%) with the benefit of a stepped-up basis. Property received at death prior to 2010 will receive the basis step up, while property received in 2010 will not. On the other hand, the accounting burden here is no different than what the service and people routinely already choose to accept when they create GRATs, QPRTs, and FLPs.  Still, there is an important difference when a person chooses, or can choose this benefit, versus cases where it is not chosen. Under current law, a family must balance the benefit of locking in the value of the asset versus the benefit of date-of-death step-up in tax basis. The decision is either made or not made.

My concern and belief is that most will attempt to wait out the uncertainty and only later will discover that many vehicles that might have saved their heirs from a big, nasty, and resurgent estate tax. In a recent WSJ article, another estate planner shares the same concern, stating simply “I would advise anyone who wants to do a GRAT or Family Limited Partnership to do it soon, like yesterday.” There are two simple reasons for this. The first is that the country is unlikely to forgo tax revenues in a time of growing deficits.  The second is that the populist sentiment in this country that should arise as a backlash from the economic crisis has only just started to be felt. The political climate will soon change to disfavor the wealthy, and there is no more glaring symbol of Bush’s Gilded Age than the nonexistent estate tax.

National Heritage Foundation files Bankruptcy

Founded on the premise that it’s not only the bona fide charitable organizations that should be able to overpay their employees, the National Heritage Foundation has been in a battle to defend the idea that all citizens should be able to create their own mini-charities and then take both the tax deductions AND salaries. Too agressive in its strategy and execution, the National Heritage Foundation first fought the IRS and then state court on fraud charges and lost. Now the NHF is in bankruptcy, and those eager to save a few dollars on their tax bill are learning the hard way the costs of overzealous planning. Annuitants owed as much as $165,000 per year will be forced to do without payment until NHF emerges from bankruptcy.

http://query.nytimes.com/gst/fullpage.html?res=9805E4DF1338F93BA35756C0A9669C8B63&sec=&spon=&partner=permalink&exprod=permalink

http://www.forbes.com/2009/01/28/charitable-gift-annuity-personal-finance-taxes_0127_gift_annuity.html