Proposed Temporary Estate Tax Rate of 35% and $5 Million Exemption

In 2009, the federal estate tax reached an exemption of $3.5 million. During 2010, the estate tax disappeared for one year. Now that we are on the eve of 2011, Congress is trying to address numerous tax increases that will take effect on January 1, 2011. One tax increase on the books to take effect on January 1, 2011 is a return to a $1 million estate tax exemption. Yesterday, Republican members of Congress and President Obama struck a deal to temporarily reinstate the federal estate tax exemption at $5 million per person, beginning with deaths that occur after December 31, 2010. This means that the estate tax will not be imposed upon a person’s estate unless the person’s taxable assets exceed $5 million. Under this compromise, the proposed estate tax exemption would be law for only two years. Again, this is only a temporary adjustment. Current law on the books would return the estate tax exemption to $1 million and estate tax rate to a maximum of 55% for deaths in 2013 and after. The proposal would also include portability of exemption between spouses so that a married couple could transfer $10 million without complicated bypass trust planning.

Unfortunately, this is a deal between Republican members of Congress and President Obama. Now President Obama has the ill-fated task of convincing Democrat members of the House and Senate to approve this compromise. It has been reported by the press that many Democrats do not support an increase in the estate tax exemption to $5 million; nor do they support an estate tax rate of 35%. In addition, President Obama said, “Republicans have asked for more generous treatment of the estate tax than I think is wise or warranted.” He also stated that this is “generous treatment” and is “temporary.”

Although not reported yet, we can assume the federal lifetime gift tax exemption will remain at $1 million and the generation skipping transfer tax (“GSTT”) exemption will also increase to $5 million, but details related to gift tax and GSTT tax have not been circulated.

Certainly, Congress will be working overtime as the Christmas break approaches to try and pass the proposed legislation, but there has already been word of lack of support in the U.S. Senate. This proposal is not law; but, we could see passage of this proposal before Christmas. Of course, we all know that strange things can happen. Everyone thought Congress would act last year at this time to avoid a year without any estate tax, and Congress failed to pass legislation. At that time, no one thought we would see 2010 be a year without any estate tax. Are we in for a repeat or will a lame duck Congress and the President actually pass this proposal? Stay tuned.

Investment Firms Required to Provide Cost Basis Information

Beginning with securities bought after January 1, 2011, investment firms will be required by law to calculate and supply cost basis information to investors. The cost basis information will be provided to the seller of the security on IRS Form 1099-B.

To date, some brokerage houses have taken the initiative to provide cost basis information to clients. For these investment firms, the new law will not be a hurdle. However, for those firms that have not historically supplied cost basis information, the new law will be an added burden to the already heavily regulated securities industry.

For financial advisors, the required cost basis information will reduce the number of calls received by tax preparers and clients seeking cost basis information. Unfortunately, the new law will still not eliminate the problems with cost basis on purchases made before January 1, 2011. In addition, I question how investment firms will implement changes to cost basis based upon the step-up in cost basis under section 1014 of the Internal Revenue Code. It has been my experience that investment firms and tax preparers are not consistently altering cost basis figures based upon date of death value step-up under the code. In this instance, will investment firms be required to reconfigure cost basis after a client's death?

Wisconsin Cures Formula Clause Woes

A few days ago, Governor Doyle of Wisconsin signed 2009 Wisconsin Act 341. This new law creates section 854.30 of the Wisconsin Statutes. Click here to read the act: http://www.legis.state.wi.us/2009/data/acts/09Act341.pdf.

Due to the current one-year repeal of the federal estate tax, if a person dies in 2010, the decedent's will or trust may not make sense. Many provisions in a person's will or revocable trust are interpreted by reference to the Internal Revenue Code, specifically, the estate tax, generation-skipping transfer tax and gift tax provisions. For couple's with larger estates, many times, the distribution of assets upon the first spouse's death is determined by the application of a formula clause. Typically, the formula clause refers to existing federal estate tax exemption amounts and Internal Revenue Code provisions. Well, for 2010, those provisions of tax law do not exist due to the estate tax repeal for 2010. Consequently, the estate plan may not work as designed.

New section 854.30 is Wisconsin's version of a cure for this ailment. Basically, the new section provides that if a person dies in 2010, and the person's will or trust includes a formula clause, then any reference to the estate tax laws in the decedent's will or trust is a reference to the laws in effect on December 31, 2009. Also, if certain factual circumstances apply, the federal applicable exclusion amount under I.R.C. § 2010(c) will be unlimited rather than equal to the 2009 figure of $3.5 million.

Wisconsin is not the first state to pass this type of legislation. Several other states have passed similar legislation in recent months to save attorneys from having to petition the court for reformation assistance on this issue. Wisconsin's new law also provides that a personal representative or trustee may also petition the court for a different construction and interpretation in the event that is logical under an estate's particular facts. Even with this new legislation, it is critical to obtain skilled legal advice in the event a client dies with a larger estate during 2010.

Uniform Durable Power of Attorney Act

Today, Governor Doyle of Wisconsin signed Assembly Bill 704 into law. The new law creates a new chapter 244 in the Wisconsin Statutes and adopts the Uniform Power of Attorney Act in Wisconsin. This new law broadly affects the creation and use of financial powers of attorney. Among other changes, the new law makes clear that unless a financial power of attorney specifically provides a gifting power, the agent under the power of attorney does not have authority to make gifts for the person who created the power of attorney.

Further, under prior law, it was unclear in Wisconsin whether a person could appoint two or more persons to act as co-agents under a power of attorney. Section 244.11 of the new law provides that a person may appoint two or more persons to serve as co-agents under a financial power of attorney. However, unless the power of attorney provides otherwise, each co-agent may act independently, which may be precisely what the creator of the power of attorney did not want to happen. This new law must be taken into consideration by banks, credit unions and other financial institutions regarding the validity and usage of powers of attorney in Wisconsin. Although the new law permits a person to name co-agents, Vogel Law Firm, Ltd., does not advise clients to name persons to act as co-agents under a financial or health care power of attorney.

Finally, lawyers in Wisconsin need to make certain that the powers of attorney they are drafting for their clients comply with the new Chapter 244 of the Wisconsin Statutes. Vogel Law Firm, Ltd., has implemented changes to its power of attorney language to make certain that all financial powers of attorney created by our firm comply with the new law.

Estate Tax Apportionment

As we continue to float down the river of no estate tax during 2010, the Wisconsin Supreme Court ruled this morning that the estate (i.e., the personal representative of an estate) and not the direct recipients of estate assets are responsible for paying estate tax liability.  In a case of first impression, the Wisconsin Supreme Court in Estate of Sheppard v. Schleis, et al., ruled that a minor child who received $3.7 million from her grandfather via payable on death (POD) designations was not required to pay any of the estate tax liability associated with her inheritance.  This is a sweet result for her, but a horrible result for the other beneficiaries of the grandfather's estate.  The Supreme Court confirmed the rule of law in Wisconsin.  Unless modified by an estate planning document (e.g., a will or trust), the estate, and not the actual recipients of inheritance dollars, is responsible for paying estate tax.  The next lawsuit will likely be a malpractice action against the drafter of the grandfather's estate plan claiming that the attorney did not adequately address estate tax apportionment.

The opposing party in the case argued for an apportionment of estate tax liability imposed on every beneficiary of the estate based upon how much money each beneficiary inherited.  Unfortunately, this will not be the case in Wisconsin unless the deceased person's will or trust explicitly requires the apportionment of estate tax liability.  To combat this disastrous result, Vogel Law Firm, Ltd., has been including estate tax apportionment clauses in our estate planning documents for nearly 10 years.  A person's will and/or trust must provide that the fiduciary has the authority to seek payment of estate tax liability from each individual beneficiary.  We live in an age where assets commonly pass to beneficiaries by beneficiary designation and we must not be flippant about beneficiary designations, especially with larger estates.

Lastly, people need to be very careful about creating payable on death, transfer on death, and other beneficiary designations. You must keep estate tax liability in mind when creating these designations.