Estate Tax Bill Signed Into Law: Now What?

orange county corporate lawyers

Estate Planning, Probate, and Trust Administration

Estate Tax Bill Signed Into Law: Now What?

George W. Bush initially received resistance from the same Senate who twice previously passed a 10 year elimination of federal estate, gift, and generation skipping taxes. However, the sluggish economy encouraged both sides of the aisle to buckle down and implement the 2001 Tax Act.

Will my existing estate planning documents need to be changed?

Your estate planning documents will continue to work and administer your assets. What will change is the desire to reconsider transfer of properties to the family if you and your spouse have a combined life expectancy of more than 10 years, assuming a complete elimination of estate taxes if extended beyond 2010.

If my wife and I have a realistic potential of dying in the next 10 years, how do I deal with this?

Estate taxes are going down, but only slightly, from 55% to 45% over 10 years, zero thereafter, if the law is extended. You still need to do planning. Many people think beyond estate taxes and want to create a legacy for their family in addition to charitable giving. It is very normal in a capitalistic, entrepreneurial society, to leave your wealth to your family members.

But will it spoil them?

The whole purpose of estate planning is to evaluate how you can best administer your funds, which we strongly recommend be in an independently administered trust. Consider using an institutional trustee, which will regulate the distribution of income and principal to your heirs. These trusts can purchase assets for the heirs, including their cars and houses, which keep them away from their future creditors and spousal claims.

Will they have pride of ownership with a Trust?

Arguably not, but life is going to change for those who have inherited wealth. It is not all a negative. It is a different style of capital accumulation for many of us who are first generation. We can’t think in terms of just our own standards and “old school” thinking. We can look at the change in thinking of those who were brought up in the Depression era, and now those who have made the money in relatively “good times.” Is either thinking wrong, or are both right? To some extent, they both have merit.

Good sound planning is the key. Bring your kids up to understand that wealth is both a responsibility and a privilege. It is not a windfall. Much can be accomplished through wealth, such as the start-up of businesses, capital provision for future enterprises and charitable goals.

What about charity?

There is still the economic benefit of income tax deductions from charitable gifts, particularly highly appreciated assets. Any family wealth plan should include a charitable foundation. Not only does it save income and estate taxes, but it creates a sense of well-being and a spiritual relationship. Ninety-three percent of all Americans believe in God and life after death. Major religions teach the responsibility of good stewardship of financial resources.

It is not my place to tell you what to do with your money. You can pay it to the government through income and estate taxes, donate it all to charity, donate it all unfettered to your children during your lifetime or upon your death, or subsidize your extended family. This is your privilege and right under the private property system of capitalism.

Each of us always needs to consider alternatives. The Busch Firm not only has the legal and financial expertise, but we have witnessed many families over the last 22 years evaluate wealth. We have observed plans which caused alienation of families over the Almighty Dollar. This is what everyone wants to avoid!

Such alienation can be avoided by giving respect to your heirs. You can say you made the money, why should they have any right to it? But you are also a steward and as a steward you have been blessed with those monies. Not to take anything away from your accomplishments, but there are a lot of people who have worked hard and still not done well financially. Maybe they were less adept at what they did; maybe they were just less fortunate. I know many people, especially recently in the wake of the downturn of this stock market, who have experienced great success or ultimate disaster due to a combination of luck and timing. Does that mean they are failures and stupid? I don’t think so. I think it all goes back to stewardship. We have a responsibility to manage our estate prudently. We have a right to do with it what we desire, but we should act prudently. We can include the children in that role or not. I do encourage the children to participate, learn about the wealth and how it was accumulated. Teach them how to make and manage money, how to be responsible and diversified, how to realize that once capital is formed, you have great advantages and you do not want to lose it. Make the children a part of the community.

Be a leader yourself. Go out and make significant donations – not $1,000 to $2,000, but $50,000, $100,000, even $1,000,000. Endow a Chair at a college or university. Build a wing at a hospital. All of this is possible through wealth that has been created over the last few years. Integrate a business plan of charitable giving. What are your family’s favorite goals and pet peeves? Don’t focus on your next door neighbor’s, focus on your own goals. What are your religious beliefs? What do you think is appropriate to help people? The charitable business is just like the entrepreneurial business. Charities compete for your dollars. If they do a good job servicing the needs of the community and they communicate that to their customer/donor base – you – then they will have a very successful charity. If they do neither of those well, they will not survive.

This is a great time, during the hiatus after the big stock market climb, to begin examining our consciences. It is time to ask ourselves why we were put on this earth, what are our charitable objectives, what are our objectives with respect to managing our family’s estate and perpetuating the wealth in perpetuity, if that be our desire. If the estate tax is gone, then we can really begin to distribute the money the way it should go, and without regard to “the tax tail wagging the financial dog.”

Based on the existing law, if I do not die in the year 2010, I have estate taxes, so what should I do?

This is the most unbelievable bill that I have ever been a part of, since practicing law.

How can anyone plan for the future when there is a one year hiatus when the estate taxes drop from 45% to zero, then effective January 1, 2011, increase to 55%? Does that mean everybody commits suicide or heirs kill their parents during 2010? This is ludicrous. I trust what George W. Bush intended to negotiate was a resolution to a very difficult issue, in an effort to adopt his $1.35 trillion income tax reduction. What must be accomplished is a revisiting of this estate tax bill within the next couple of years, preferably during the George W. Bush administration, to effectively extend the cancellation of estate taxes or phase them out over an additional 5 to 10 years from 45% to zero. The latter is the most likely.

What about the income tax step up in basis?

Effective 2001, the Act eliminates the income tax step up in basis for transfers above $4.3 million (up to $3 million for transfers to spouses). Step up in basis is a provision which allows a decedent to increase their income tax basis to the fair market value of the assets at the time of death. The theory is that if someone pays estate taxes, they should not be hindered by an additional income tax on the unrecognized appreciated value. Congress tried this unsuccessfully in 1976. It is a nightmare for record keeping, but maybe with personal computers it can be managed more easily. Further, brokerage firms are more up to speed on how they administer their reporting. It is a fair provision, because income taxes can be regulated based on discretionary sales, tax free exchanges, use of charitable remainder trusts and other tax planning vehicles.

What about gift taxes?

Gift taxes are going to be reduced to 45% for lifetime gifts above $1,000,000, then capped at that rate, even in 2010 or thereafter. The reason is that Congress felt the absence of gift tax would motivate taxpayers to shift their assets to lower income tax rate heirs. However, the income tax rates are so compressed, the amount of income shifting is relatively minuscule compared to years past, when rates ranged from 14% to 70%, where now they range from 15% to 39.6%. Further, after $280,000 of income, a taxpayer is in the maximum tax rate bracket. Nevertheless, gift taxes are here to stay, which means the first generation will keep the money until death, assuming estate taxes are permanently eliminated beyond 2010.

These are exciting times and we at The Busch Firm, through Rick Weiner, Scott Harshman, Layne Rushforth, David Hehn and myself, are ready to advise on these issues. We do not impose our philosophy on your decision, that is your call. But we will give you options and strategies we have used and seen succeed. You can really develop a harmonious family relationship if it is handled openly, honestly, and without the central control by the patriarch and matriarch, with a need to “lord it over” the inheritors of your wealth. Be humble and understand; you love your children and grandchildren and want to provide for them. That is the natural thing to do.