For anyone who missed it, Dan Duncan, a Houston, Texas, oil billionaire passed away earlier this year. Because he died in 2010, with no federal estate tax in place, his entire $9 billion estate will pass tax free. Had he died in 2009, his estate would have owed Uncle Sam approximately $4 billion. Of course, had Mr. Duncan been a resident of Washington State, an estate tax would be due on all assets valued over $2 million.
Recent reports indicate the Senate may be close to an estate tax compromise. The compromise, which needs 60 votes to pass, would set the federal estate tax exemption at $5 million and impose a top tax rate of 35%. If passed it would mean many families will be able to pass their estates free from federal tax. Estate Planning in Washington, however, would still be essential. We still have an estate tax with a $2 million exemption limit, families have businesses and real estate that require planning to effectively pass such assets to the next generation, and many people now find that long term care issues can be a greater threat to leaving a legacy than estate taxes.
Contrary to many people’s belief, your assets will not necessarily pass to the state if you don’t have a Will. In all likelihood, Washington State’s laws of intestacy will apply to pass assets to your heirs. Only if you have no heirs to receive your estate would your assets go to the state of Washington. In most circumstances an heir can be found. I was recently involved in a matter where much of the estate went to heirs located in Europe that the testator had never met. There are many reasons, however, why you might want to avoid this situation. If you want to make sure people you have never met do not receive your assets, a Will is very beneficial. Further, the intestacy laws will not help if you want a specific person to receive a specific asset, nor will they address estate tax or long term care issues; and, intestacy laws cannot ensure your minor children are taken care of by the person you desire. Those issues can only be addressed through a detailed estate plan captured in a Will, trust or both.
I’m frequently asked: “How much can I give away tax free?” In 2010 you can give up to $13,000 in cash or property to any one person completely gift tax free. If you are married, you and your spouse can double that tax free gift to $26,000 per recipient. So if you have two children and four grandchildren a married couple could give a total of $156,000 ($26,000 to each of the six individuals). You may also pay for a person’s educational expenses or medical bills in the same year in addition to the direct gifts of $13,000 per person. Therefore, you could pay your grandchild’s college tuition and give him or her $13,000 ($26,000 if you are married) in 2010 without incurring any gift tax. One word of caution regarding tuition and medical – you must pay the institution or provider directly. Do not write the check to the individual and have them pay the school or hospital.
For individuals with substantial estates this can be an effective strategy to help your family members while reducing the value of your estate. You can therefore minimize your estate tax burden and still enjoy helping out your family.
There are a couple of things to keep in mind with gifting programs. First is that you are not entitled to get any of that money back. If you ultimately need those gifted funds, the recipient, if he or she still has the money, is under no legal obligation to help you out. The moral: be sure your gifting will not impoverish you. Second, if you have reason to believe you may need to qualify for Medicaid in the future, the state will look at all gifts within the five year period of time prior to applying for Medicaid. If there are gifts during this five year period, you may be ineligible to receive Medicaid for a period of time.
With the estate tax in flux this year, you may want to revise your wills to make sure your bases are covered. If you have a will that leaves assets to a person based on an estate tax formula it may need revision. For instance, some wills leave assets to children based on an amount that can pass free of federal estate tax. If this is the case, in 2010, presumably all assets would pass to those children under this language. Such a scenario may leave little or nothing for a surviving spouse. Often this is not a person’s intent. Additionally, you may want to have language included to address an estate tax with a $1 million exemption limit or a higher limit, depending on what Congress does or does not do later this year.
You should also consider to whom your assets will pass and how they will be affected by the capital gains tax. If you are leaving more than $1.3 million to someone other than your spouse, you may want to make sure your executor knows how to allocate the step-up in basis, applicable to estates of persons dying in 2010. If the basis step-up won’t cover all such assets (so as to minimize future capital gains taxes on an asset’s sale), it may be wise to include language guiding the executor to allocate the basis step-up in a manner that minimizes the tax burden on all beneficiaries. Hopefully such language will reduce the potential for strife among family members.
The evening of Wednesday, April 28, 2010, I will present an estate planning seminar at the downtown Bellevue, Washington branch of Homestreet Bank. This presentation starts at 6:00 p.m. and is scheduled to run until 7:30 p.m. Also, on Friday, April 30, 2010, I will conduct an estate planning seminar from 12:45 to 2:00 p.m. at the Peter Kirk Community Center in Kirkland, Washington. Each presentation will focus on estate planning in a world with and without the federal estate tax.
An increasingly important aspect of a person’s financial life is that many people now receive and pay bills online and/or through email. Similarly, bank, brokerage and retirement accounts may also be maintained and accesses electronically. A bill may come via email and if an executor or attorney-in-fact does not know the password access may be difficult if not impossible to gain. Even worse if you cannot check a person’s email, you may never know an account exists. It is now increasingly important for people to maintain a list in of online business activities and the passwords that correspond with those activities. Such a list will go a long way toward helping your family administer your affairs if you are unable, or after you pass on.
The evening of Tuesday, April 20, 2010, I will present an estate planning seminar at the Bellevue, Washington offices of Waddell & Reed. This presentation starts at 6:00 p.m. and is scheduled to run until 7:30 p.m. Also, on Friday, April 23, 2010, financial planner David Harry and I will conduct an estate and financial planning seminar beginning at 11:30 a.m. at the Northshore YMCA in Bothell, Washington. Each presentation will focus on estate planning in a world with and without the federal estate tax.
In a previous post I advised family members of things to look for to protect their parents. Of course, if an older individual has the ability he or she will be primarily responsible for his or her own protection. The Mature Market Institute has several helpful hints to protect oneself:
You can find out more at www.maturemarketinstitute.com.
The Washington state legislature has recently proposed to double the estate tax rate. The current estate tax rates start at 10 percent and rise to 19 percent. The proposed increase doubles the current rate with a top rate reaching 38 percent. If signed into law the increase will take effect on April 1, 2010.
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