House Passes Amendment To Estate Tax Law

Yesterday, the U.S. House passed H.R. 4154 by a vote of 225-200. No republicans voted for this bill. As I expected would happen before year end, Congress is pushing for a continuance of the current $3.5 million federal estate tax exemption. H.R. 4154 extends the current exemption of $3.5 million per person indefinitely. If this bill becomes law, the current elimination of estate tax in 2010 and resurfacing of a $1 million estate tax exemption in 2011 will not occur.

For estates that exceed $3.5 million, the estate tax rate will be 45%. This means that for every dollar a deceased person's estate exceeds $3.5 million, the estate will owe $0.45 to the IRS. Also, H.R. 4145 does not include a provision related to portability of estate tax exemptions between spouses. This means that lawyers must continue to use flexible trust plans that create bypass trusts upon the first spouse's death to utilize both spouses' exemptions.

As we approach the reality of no estate tax in 2010, Congress is nearly certain to pass this legislation. I suspect the U.S. Senate will take up this bill quickly and send a final version to President Obama for signature. During his campaign, President Obama spoke of his support for a $3.5 million estate tax exemption and this bill aligns itself perfectly with his position.

By Michael W. Vogel

Estate Tax laws may be changing again

In Washington, even in the midst of countless health care bill discussions, Congress is finally realizing that it may want to allocate some time to discussing estate tax laws. Over the last month, the House Ways and Means Committee has been discussing the topic of estate tax more regularly.

As is stands, the federal estate tax exemption is $3.5 million per person. If no changes are made to existing law, the estate tax will disappear in 2010 and reappear in 2011 with an exemption of $1 million. I don't think anyone is seriously thinking Congress will let current law simply take its course. Until recently, it seemed that Congress would impose a one year extension of the current $3.5 million exemption. However, new bi-partisan developments indicate that we may see new legislation that permanently fixes the existing estate tax enigma.

On October 22, 2009, House Ways and Means Committee members from Nevada, Texas, Alabama, and California introduced H.R. 3905 ("Estate Tax Relief Act of 2009"). This new proposal would keep the current $3.5 million exemption, but would increase the exemption by $150,000 and decrease the tax rate by 1% each year until 2019. Currently, the federal estate tax rate is 45% (i.e., for each dollar a person's estate exceeds the estate tax exemption, the estate is taxed $0.45). Under this proposal, in year 2019, the estate tax exemption would be $5 million and the tax rate would be reduced to 35%. The new proposal would also make the 2001 changes to the allocation of the Generation Skipping Transfer Tax exemption permanent.

H.R. 3905 is aggressive and likely will not be embraced by a full democratic House. Fortunately, Congress now seems to realize that the current state of estate tax laws cannot continue much longer. I still believe we will see a change to existing law passed by December 31, 2009. Unfortunately, due to Congress' obsession with health care discussions, we may only see a patch that continues the current exemption of $3.5 million into 2010.

By: Michael W. Vogel

To Deed or Not To Deed

For the last 15 years or so, adding the names of children to the deed to a parents' home has become commonplace. But, the fundamental question is whether this is a good idea legally. There is usually one reason that our clients want to deed their home to their children—they are afraid of nursing home costs and want to protect a valuable asset from being "taken" to pay for nursing home care. I don't blame anyone who has a healthy fear of nursing home costs. Depending upon the level of care needed, a nursing home will cost $6,000-$9,000 per month in the state of Wisconsin. OUCH! That's expensive and certainly creates some fear. To alleviate fear, a common suggestion from friends and many lawyers is to deed your real estate to your children to start the Medicaid five-year look-back period, but is this wise? We want to start the five-year look-back period, but should we really deed the house to the children?

Unfortunately, simply deeding your home or other real estate to your children is not a panacea. Yes, it will start the Medicaid five-year look-back clock ticking, but deeding property to your children comes with risk. Once the deed is done, your child or children now own a legal interest in your real estate. Often, you no longer own the real estate or you retain a life estate interest. The risk is your child's unknown financial future. If your child encounters debt issues, divorces, gets sued for money, or files bankruptcy, your home is placed in jeopardy. I recently assisted a client with the misery of paying a bankruptcy trustee a large sum of money to buy-back her daughter's interest in my client's home because her daughter's name was on the deed. This can be a nightmare!

What's the solution? People need lawyers who are creative thinkers. The solution is for a client to create an irrevocable trust to own the legal interest in your real estate that the client wants to give away. The client's children are the beneficiaries of the trust and the trust continues to exist until the client's death. If needed, the client may also continue to own a life estate (client keeps lifetime control) with the trust owning what is called a remainder interest in the real estate. Don't simply deed real estate to your children. You need greater protection. You need a properly drafted trust.

By: Michael W. Vogel