Law Offices of

HAROLD S. SMALL

Articles

Two Year Extension
By Harold S. Small, J.D., CPA (inactive), AEP

During the recent lame duck session of Congress it passed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“Tax Relief Act”) also known as H.R. 4853. The President signed the act and it became law in mid-December, 2010.

Media articles have provided the quick thumbnail on income tax rates; they will stay at current levels for 2011 and 2012. Also, the capital gains rate has been continued through December 31, 2012 (a maximum rate of 15%). It also continues the 100% exclusion of gain realized from qualified small business stock held for more than 5 years.

The Estate Tax Compromise that many thought would happen early in 2010 finally happened in the Tax Relief Act. There is an estate tax for estates in excess of $5,000,000 and the rate is 35% for estates of decedents that die on or before December 31, 2010. For individuals/couples with estates of $5,000,000 or more the new years' day surprise on January 1, 2013 will be a reversion to a much lower exempt amount and a higher tax rate if Congress does not act again. That's right, a sunset provision in the law removes these changes at that time.

Estate planning for estates is still very important for everyone. Asset distribution issues and avoiding conservatorships are the most important reasons for estate planning for people with estates under $5,000,000 (currently, and $1,000,000 on or after January 1, 2013). Saving of estate taxes is still an issue for those with estates in excess of these amounts. It is time to dust off the old documents and have them reviewed and updated. If there are no wills or trusts in existence, then contact an attorney to assist you.

As indicated in a previous article, by having appropriate estate planning documents in place individuals can accomplish the following:

1. Directions can be provided relating to the distribution of assets from an estate – who gets what and when?
2. Probate can be avoided if the assets are placed into a living trust.
3. The person creating the trust (commonly referred to as Trustor or as Settlor) designates who will act as the Trustee of the Trust to administer their Trust if they are incapacitated or upon their death.
4. While the probate process involves filings that are a matter of public record (e.g. an inventory of estate assets and the filing of the will with the court), the administration of a trust is a private process and not accessible as a part of the public records absent litigation.
5. When there are minor children, the execution of a will can provide directions relating to who is to take care of the children if something happens to the parents and also who takes care of the assets of the minor children during their minority.
6. We will still use life insurance to create larger estates (more money/assets than would otherwise exist for the benefit of family members following death).
7. We will still use disability insurance policies to provide continuing income after the onset/occurrence of a disability.
8. We will still use long term care insurance to provide payment benefits for long term care.
9. We will still use Advance Health Care Directives (frequently referred to as living wills) to provide directions for what is to occur when the signing party is no longer able to make health care decisions for himself/herself.
10. We will still use powers of attorney where appropriate so that actions may be taken for the benefit of the person signing the power of attorney.
11. There will still be gifting of assets, although the timing and nature of gifting may change.
12. People can still provide for charities in their estate planning documents and their gifts will be driven by more altruistic reasons than estate or income tax avoidance.
13. Beneficiary designations are still needed for qualified employee benefit plans.
14. Beneficiary designations are still needed for life insurance policies.

As you can see, there are a number of reasons to do estate planning. These will continue to be appropriate reasons and actions to take even with a $5,000,000 exemption from estate taxes or any other amount or no estate tax. Those having the greatest need to review their plans have estates of $5,000,000 or more. However, there are tax/cost basis and step-up in basis issues that affect many below this amount, so all estate plans need review in order to take into consideration the recent changes in the law. Because of the new basis provisions, anyone owning property susceptible to a gain or loss on sale or a step-up in basis should accumulate cost basis information and have it available. This information may be needed now or at the expiration of the tax patch/change of the Tax Relief Act.

We assist clients in dealing with these areas and satisfying their needs by the preparation and drafting of wills, trusts (both revocable and irrevocable), advice relating to the acquisition of life insurance, disability insurance, and long-term care insurance, the preparation of Advance Health Care Directives, gifting, and other estate planning documents.

For those with minor children, it is important that at a bare minimum that they have current and effective wills that provide directions to the Court as to who will be the best person/people to act as their guardian.

Think of estate planning as asset distribution planning. For example, when a couple is going through a divorce/marital dissolution it is important that their existing estate plan be reviewed and new documents executed to effectuate their desires. More importantly, think of estate planning as providing guidance and peace of mind for family members following a death.

Consideration should be given to removing from the file drawer the will or trust that was executed under the old law and reviewing them to see what asset distribution provisions need change. Then you should call your attorney to seek his/her advice regarding what changes are needed to those documents to carry out your wishes and also give consideration to the law changes and the impact that they may have. See my article on “Family Asset Distribution Planning: that may be helpful to you as well as the article about “Estate Planning and Choosing an Attorney.” If you do not have a will and a trust, then call an attorney to schedule an appointment and have these documents prepared for you.

IRS CIRCULAR 230 DISCLOSURE: INTERNAL REVENUE SERVICE REGULATIONS GENERALLY PROVIDE THAT, FOR THE PURPOSE OF AVOIDING FEDERAL TAX PENALTIES, A TAXPAYER MAY RELY ON FORMAL WRITTEN ADVICE MEETING SPECIFIC REQUIREMENTS. TO ENSURE COMPLIANCE WITH THE IRS REQUIREMENTS THIS NOTICE INFORMS YOU THAT ANY FEDERAL TAX ADVICE CONTAINED IN THIS ARTICLE OR ANY OTHER ARTICLE OR COMMUNICATION ON THIS WEB SITE (INCLUDING ATTACHMENTS) DOES NOT MEET THOSE REQUIREMENTS. ACCORDINGLY, THE TAX ADVICE IS NOT INTENDED, WRITTEN OR PROVIDED TO BE USED, AND IT CANNOT BE USED FOR THE PURPOSE OF (i) AVOIDING FEDERAL TAX PENALTIES OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTER ADDRESSED ABOVE OR ON THIS WEB SITE.

THE FOREGOING CONCEPTS AND IDEAS ARE GENERAL STATEMENTS AND ARE INTENDED TO PROVIDE CONCEPTS FOR CONSIDERATION IN BUSINESS AND TAX PLANNING. CAREFUL CONSIDERATION NEEDS TO BE GIVEN BY THE READER REGARDING THE USE AND APPLICATION OF THE CONCEPTS. YOUR LEGAL AND TAX COUNSEL SHOULD BE CONSULTED BEFORE THE IMPLEMENTATION OF ANY OF THE IDEAS INDICATED ABOVE OR USE OF THE INFORMATION CONTAINED IN THIS ARTICLE. SHOULD YOU HAVE QUESTIONS REGARDING THIS MATTER, HAROLD S. SMALL, ESQ., CAN BE REACHED AT 12526 HIGH BLUFF DRIVE, SUITE 300 , SAN DIEGO , CALIFORNIA 92130 OR AT 858.759.4600.

© 2010 by Harold S. Small, J.D., CPA (inactive) , AEP