Permanent Tax Law. Are you serious?

Obviously, President Obama still needs to sign the fiscal cliff bill that passed the Senate and House, but assuming he does so, our country’s tax law just became much more predictable. Sometimes, even legislators surprise me. As everyone knows, congress passed legislation to permanently extend the majority of provisions originally enacted under the Bush Administration by virtue of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Amazingly, these are “permanent” extensions. In 2010, congress extended the tax provisions for two years by passing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Now, congress has nearly done the unthinkable. We now have fixed tax law. We can plan. We can forecast. We can sleep.

As the fiscal cliff drew closer, estate planning attorneys from around the country were scurrying with their clients to move money out of clients’ estates. The fear of being subject to a $1 million estate tax exemption was unthinkable to many, especially older clients with assets between $1 million and $5 million. I tend to believe that more money was transferred from one generation to the next in 2012 than in any other year in history. In fact, if we could see numbers, I suspect the month of December may have surpassed any other single month in history.

Fortunately, the new legislation provides us with permanent gift tax, estate tax, and generation-skipping transfer tax law. This is a tremendous relief from a planning perspective. The new law repeals the sunset provisions of Title IX of EGTRRA and section 304 of the Job Creation Act of 2010. The federal estate tax applicable exclusion amount and generation-skipping transfer tax exemption will remain $5.12 million per person in 2013. In addition, the current index for inflation will remain in place moving forward. Due to the inflationary index, the exemption will grow each year. It is possible that the 2013 amount of $5.12 may be increased slightly, but I have not seen any figures yet. The only change relates to the actual estate tax rate. In 2012, if a decedent’s estate exceeded $5.12 million, his or her estate was subject to tax at 35% on all amounts above $5.12 million. Beginning in 2013, the tax rate will be 40%. This is the result of a compromise between Republicans and Democrats. The Republicans retained the higher exemption amounts, but the Democrats gained a higher tax rate.

The lifetime gift tax exemption of $5.12 million will remain in place subject to the same inflationary index. This is also pleasant news, because the estate tax, gift tax, and generation-skipping transfer tax exemptions will remain unified. This unification creates simpler planning. For 2013, the federal gift tax annual exclusion has been increased to $14,000 per donee. Last year, the exclusion amount was $13,000, but the inflationary index made the amount increase to $14,000 for 2013.

Serving as a Personal Representative or Executor

Recently, I was interviewed by an author regarding the obligations and responsibilities imposed upon a personal representative, administrator, or executor of an estate.  The article was published by the Credit Union National Association, Inc.  You may read the article by clicking on this link:  http://hffo.cuna.org/download/3161_turningpoint.pdf

New Tax Proposed for Inherited IRAs

Senator Max Baucus, who is the chairman of the Senate Finance Committee, has proposed a new tax law provision that would require all persons inheriting assets held in an Individual Retirement Account, such as a 401(k) or a traditional IRA, to remove all assets from the accounts within five years and pay the income tax on the accounts. Currently, the Internal Revenue Code permits beneficiaries to stretch out the distribution of the retirement account assets over the life expectancy of the designated beneficiary. For example, a ten-year-old beneficiary could stretch out the required minimum distributions over a period of seventy-three years.

The logic of Senator Baucus is that Individual Retirement Accounts are designed for retirement and not inheritance. Senator Baucus’ proposal was attached to the Highway Investment, Job Creation and Economic Growth Act of 2012. However, it was removed in Committee. Even though the proposal was removed from the Act, Senator Baucus has indicated strongly that he does want to attach it to a future bill.

The impact of this legislation would be significant on estate planning for several families. In addition, the tax impact on beneficiaries inheriting IRAs would be significant. The proposed rule would not apply to surviving spouses and other specific classes of beneficiaries, including, children with special needs.

While recently, this legislative proposal appears dead for the time being, the idea could easily come up again as Congress seeks diligently for revenue increases to address the daunting federal deficit.

Long-Term Industry Continues to Change

The Long-Term Care Insurance market has experienced numerous changes over the last couple years. A few major companies have announced that they will discontinue selling long-term care policies. Among this group of insurers are Prudential Financial, Unum Group and Met Life. According to information that I follow, 10 out of the top 20 insurance companies have exited the long-term care market in the last five years.

Over the past several months, I have followed the changes to the long-term care industry. During this time, I kept thinking about John Hancock and wondering what this company would do to handle the rising out-flow of long-term care benefits. For the companies that have remained in the long-term care business, rate increases are becoming the norm and this now includes John Hancock. According to Roy Anderson, John Hancock’s Vice President of Corporate Communications, “The long-term care industry is still young, and only now is seeing actual usage data which indicate the need for rate increases.” Corresponding with this announcement, the Chicago Sun Times recently published a story about a couple in Illinois facing a 90% increase to their long-term care premium. Click on link to view full article: http://www.suntimes.com/business/savage/11378009-452/how-is-a-90-long-term-care-rate-hike-ok.html. The Star-Tribune in Minnesota recently reported a similar story.  Click on the following link: http://www.startribune.com/business/yourmoney/143267316.html?source=error.

Hopefully, this information helps you assist your clients with long-term care decisions and gives you insight into this volatile piece of the insurance market. I question whether any company can really make money in the long-term care market. With costs rising significantly, the option of long-term care insurance may become too difficult for people to stomach.

Steve Jobs Died

As nearly the entire world knows by now, Steve Jobs, the founder of Apple died on Wednesday evening. He and Steve Wozniak were the founders of Apple. Essentially, rising from the ashes as an adopted child, Steve Jobs was responsible for establishing one of, if not the most, iconic brands ever. After hearing of Steve Job’s death, my mind shifts to estate planning.

His worth is estimated to be $7 billion. Quite likely, a vast majority of his wealth is a heavy concentration of Apple common stock. This morning I contemplated the following:

1. His estate will receive a step-up in basis under section 1014 of the Internal Revenue Code based upon the Hi/Low average of the trading price for Apple common stock on October 5, 2011. This is a tremendous benefit because Apple stock is very near an all-time high. The stock closed at $378.25. His new basis per share is $378.68. I also thought about the fact that he died in the evening. Perhaps, if he had died while the market was still open, the stock may have dropped in price causing his estate to obtain a lesser step-up in cost basis.

2. I then considered Steve Job’s family. He left a wife and four children. What type of estate plan did he create, if any? If he did extensive planning, who was his attorney. How does a multi-billionaire go about choosing an estate planning attorney? What types of trusts did he create? Does he have a family foundation? Will monies be contributed to the family foundation upon Steve Job’s death, or did he simply leave all assets to his wife in various trusts? If he did leave assets to his wife, is a motivation his partial reliance upon Congress ultimately eliminating the estate tax, which would result in his children inheriting his wealth transfer tax free?

3. Then I thought about the preparation of his estate tax return. Some professional tax attorney or CPA has the utmost privilege of preparing his estate tax return. Who is it? How is this person selected? Also, has he been aggressively gifting through use of GRATs and other freeze techniques since learning of his cancer diagnosis?

The above are just a few of my thoughts. Like any other family facing the death of a loved one, the family of Steve Jobs must now cope with a variety of financial, legal and tax matters. Hopefully, Steve Jobs was amply prepared.

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?