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.

Estate Tax Update

For those of you keeping abreast of the Estate Tax saga, this brief post provides a few links to information regarding the impending lapse of the Estate Tax, which appears will come to fruition. Some lawmakers, however, are determined to make sure that the expiration will not last for long. Until new legislation is enacted, you need to be aware of what will happen regarding the Estate Tax and Generation-Skipping Transfer Tax.

As we approach the New Year, the Estate-Tax-Expiration Watch will continue with great interest. As is typical of government, however, there is a high probability that no one will actually be allowed to leave this world without succumbing to some type of Estate Tax, as there is bound to be serious discussion on retroactivity of the new legislation. Stay tuned. . .

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

Password Please

Not long ago, in a world that now seems to have existed only in our memories, the safe-deposit box key was the only item clients had to make sure someone knew of to access secret or private information. Now, with assets and information locked away in various email accounts, social networking sites, and online bank accounts, clients must make plans for passing along passwords as part of their estate plans.

Whether your clients download from iTunes or tweet away on Twitter, someone must know the passwords to access accounts after your clients have passed away. Incorporating passwords into an estate plan should not be optional. As this post highlights, some online accounts may offer alternatives to access the account. However, there is no reason to force your client's loved ones to go through unnecessary hoops. Plan properly, plan thoroughly, and leave a legacy, not a mess.