REPORT: ESTATE TAX BURDEN FALLS DISPROPORTIONATELY ON SAME-SEX COUPLES

Here is a link to an interesting and humbling study released from UCLA concerning Same Sex couples and the Estate Tax.

The headline reads: New Study by Williams Institute Finds that Exclusion from the Estate Tax Marital Deduction Will Cost Affected Same-Sex Couples $3.3 million On Average

For the key findings and links to the full report, click here.

No Federal Estate Tax, but What About Your State?

As a reminder, we in MA have a $1,000,000 estate tax. Our trusts and wills account for this. If you have any questions, always feel free to email or call the office.


By: Paul Sullivan
The New York Times

The first quarter is nearly over, and the federal government has made no move to reinstitute the estate tax. So dying today seems free, right?

There is just one problem: If you live in one of 20 states with a state estate tax, you could find your existing estate tax plans causing more harm than good.

State estate taxes are not new. They had just been a secondary element in the course of figuring out the much higher federal estate tax.

Now, the issue is sorting through wills written to maximize the old federal exemption from estate taxes — $3.5 million in 2009. In states with their own estate taxes, some of these provisions could distribute money and incur taxes in ways the deceased never expected — or maybe not if the federal estate tax is reinstated. As Jerry Weihs, director of advanced planning at Sun Life Financial, said: “We’re in a state of ambiguity.”

AUTOMATIC MISTAKES The biggest issue with the state estate taxes is wills that contain so-called formula clauses. Many wills were redrafted in the last decade to take into account the increasing federal estate tax exemption. Instead of rewriting the will every few years, clauses were put in to reflect the rising exemption amount.

Two commonly worded clauses for estates that left money in trusts could cause problems. “If the clause says you leave the applicable exclusion to your kids and the rest to a second spouse, that could now mean leaving nothing to your children since there is no applicable exclusion in 2010,” said Sharon Klein, head of wealth advisory at Lazard Wealth Management. “The other issue is if you leave the maximum that could pass free of federal tax to your children and the rest to a second wife, then it is skewed toward the kids, and the wife is disinherited.”

So far 12 states have introduced legislation to remedy this, but the proposals vary. New York, for example, looks at the intent of the will on Dec. 31, 2009, but this applies only if there is a surviving spouse. A formula clause that splits assets between nieces and charity will not function as intended. Florida’s solution could be even more contentious: it allows a judge to interpret the intent of the deceased, if a trustee or a beneficiary challenges the will.

UNEXPECTED TAXES A formula clause can also cause another costly problem. If it was written to send as much money as possible free of federal estate taxes to a credit shelter trust, the estate could pay an unexpected amount in state estate taxes.

That is because estate plans were often written so that the maximum amount that would not incur federal estate taxes would be passed to one set of heirs and the rest to a surviving spouse tax-free. In New York, which has a $1 million state exemption, the estate would have paid $229,200 in state estate taxes on the difference between the New York exemption level and the $3.5 million federal exemption.

Today, the entire estate could pass free of federal taxes. This could lead to an unexpectedly high state tax bill, said Stephen Akers, associate fiduciary counsel at Bessemer Trust. He said the tax on a $25 million estate in New York would be $3,466,800.

“In retrospect, it could be wise to pay that,” Mr. Akers said. “You might be able to avoid the federal estate tax on that much money.” But that is a big if, and it depends on whether Congress decides to make a new estate tax retroactive.

MARRIAGE PROBLEMS The absence of a federal estate tax also raises the question of whether an estate can finance a qualified terminal interest property (QTIP) trust. Such trusts hold assets left to a surviving spouse free of tax until the second spouse dies. The glitch is that a QTIP trust was typically selected when filing the federal estate tax return.

Mr. Akers said several states like Connecticut, Massachusetts and Pennsylvania have a state QTIP election and others are working on it.

In theory, people living in these states could end up far ahead of where they otherwise would have been, he said. If someone left his estate in a state QTIP trust, the surviving spouse would not have to pay estate taxes on it when she died. This is because the estate tax for the surviving spouse comes into play only if a marital deduction is allowed when the first spouse dies. Since there is no federal estate tax return to file, the marital deduction is not an option now.

Mr. Akers said this had not been tested, but it was a better option than leaving assets outright to a spouse, which would certainly be taxed when the spouse died.

Ms. Klein said she was advising clients to set up QTIP trusts, where allowed, as a hedge. By filing extensions to the estate tax returns, you could have up to 15 months to make the election, at which point the estate tax landscape should be clearer.

SNOWBIRD TRAP More jarring to retirees who escape to Florida in the winter may be a bill under debate in that state’s legislature. It proposes to tax property owned by non-Florida residents who are residents of states with state estate taxes.

This is a radical change for Florida, which has long enticed wealthy residents because it had no income or estate taxes. The proposal, on the surface, is a battle between states: Florida wants its cut of any estate tax collected by another state on Florida property. (As proposed, people who live in states without an estate tax will be exempt.) But where it would affect nonresidents is in the legal costs to make sure Florida gets its cut.

And there are also immediate costs of Congressional inaction: changing your will to reflect your state estate tax is not free. “There are going to be significant expenses for what may well be a temporary situation,” Mr. Weihs said.

Trying to Get Foxx's Estate Out of the Redd

Interesting story from one of my father's favorite actors. I thought you might enjoy. Shawn

By Steve Friess

LAS VEGAS (March 7) -- It could easily have been the plot for a "Sanford and Son" episode: a bizarre money-making scheme cooked up by a well-meaning but possibly misguided man that seems destined to go comically awry.

But in this real-life case, it's a county official in Las Vegas who is trying to put the life story of late "Sanford" star Redd Foxx on the block to resolve mammoth debt the actor left behind. Foxx owed more the $3.6 million in taxes to the IRS when he died 19 years ago.

The trouble is, it's not clear that such a thing can actually be sold or what its value might be.

When Cahill surveyed the outstanding cases after taking office in 2007, Foxx's name stood out. The performer was a longtime resident of Las Vegas, where he frequently performed stand-up comedy during his career. He died in 1991 at a Los Angeles hospital.

Cahill learned that Foxx's daughter, Debraca Foxx, had been removed in 2006 as the administrator of the actor's estate because she had failed to provide an accounting of revenue received in royalties, residuals and licensing deals since her father's death.

Foxx's fourth wife and widow, Ka Ho Foxx, has accused Debraca Foxx in court filings of pocketing money that should have gone toward paying down the tax debt. As a result of the family squabble, the probate court put the public administrator in charge of managing the estate and resolving the debts.

Since 2007, Cahill's office has aggressively pursued the case, according to public documents, collecting more than $101,000 owed to the estate. Payments include a $5,000 fee from CBS Studios for use of a video clip of Redd Foxx in an episode of "Everybody Hates Chris" and $3,000 from Hallmark for use of Foxx's image on a greeting card.

"The estate had no assets at all at that time, although we've been able to locate some assets, collect some royalties since then," Cahill said. "This was the big-ticket item, the rights to his story. That was an asset to be marketed."

So Cahill kept his efforts to sell the story quiet until last month, when his office issued an unusual press release announcing that it had received offers from $20,000 to $2 million and that Cahill had done lunch and taken meetings with Hollywood types.

A producer even brought along an actor interested in playing Foxx "who was in a popular TV series that had recently ended," Cahill said in an interview. He declined to disclose the actor's name but said the deal fell through, as has every other prospect.

"Who I'm waiting to call, the call that would make my day would be Jamie Foxx," Cahill said. "That would be great for so many reasons. There's the connection there." The Oscar-winning actor's professional name is an homage to Redd Foxx.

The deals may have failed because the concept of selling a life's story is one that doesn't exist, said intellectual property rights attorney Eric J. Goodman, a partner in the law firm of Burkhalter, Kessler, Goodman and George in Orange County. He regularly deals with celebrity cases.

Goodman said Nevada allows for the marketing of someone's "right of publicity," defined in the law as the ability to use a "name, voice, signature, photograph or likeness" of anyone for commercial purposes.

Among the exceptions, however, is "the use in connection to an original work of art" and the use "to portray, imitate, simulate or impersonate a person in a play, book, magazine article, newspaper article, musical composition, film, or a radio, television or other audio or visual program, except where the use is directly connected with commercial sponsorship."

"The issue for the administrator is if they're going to sell bobblehead dolls, great, that can be bequeathed to an estate," Goodman said. "But he's proposing the use of Redd Foxx's name for commercial use. A film is a piece of art. I think the administrator has good intentions and this is a very creative idea, but what he's selling is the Brooklyn Bridge here. Who's to say anybody else can't come along and sell their own biography of him?"

Travis Twitchell, a Las Vegas-based attorney hired by Cahill's office, reads the law differently. To him, the use of Foxx's name or portrayal in a movie would be a commercial endeavor.

But Twitchell's definition presents other problems -- namely that, in his view, a filmmaker could never tell Foxx's life story without participation from and possible compensation for other people in his life. Neither Cahill nor Twitchell can promise any prospective buyer that Foxx's survivors would go along -- thereby undermining the value of the rights.

Debraca Foxx remains under an unfilled court order to account for money received during her years as administrator. She could not be reached for comment. And an attorney for Ka Ho Foxx said she plans to object in court to Cahill's effort to market the rights.

As for Cahill, he plans to step out of the Hollywood arena. At an April court hearing, he expects a probate judge to approve a licensing deal with CMG Brands, a large Hollywood firm that licenses the image and material of dozens of stars.

He realized he was out of his depth, he said, when he dined with the unnamed producer and TV star. It was hardly glamorous, just a quiet meal at a suburban chain restaurant about 10 miles from the seemingly more appropriate setting of the Las Vegas Strip.

"We did joke around about who would play me," said Cahill, sort of a burly, Wilford Brimley-meets-Ed Asner type. "But how Hollywood does what they do is something of a mystery to me. We're about to find out."

Traditional to Roth IRA conversions: Don’t be tripped up by tax implications

Another good overview from The Boston Globe.

By Humberto Cruz
When you try to oversimplify tax matters, you often commit inaccuracies. I’ve found plenty, from slight to gross, in the nearly incessant media commentary about Roth IRA conversions. No wonder readers are confused.

As of this year, anybody with a traditional IRA can convert all or part of it to a Roth IRA. A Roth IRA offers the potential for future tax-free withdrawals. But if you convert, you will owe income taxes on the converted amount the same as if you withdrew the money from the traditional IRA (but with no 10 percent penalty, regardless of age).

That’s where the first inaccuracy creeps in. Many reports I’ve read state that if you convert, you will be taxed “upon conversion.’’ That phrase has led many readers to believe that as soon as you make a conversion you must send a check to the IRS for the taxes due on that conversion.

Not so. The taxable amount of the conversion simply counts as taxable income for the year. How much of the converted amount is taxable will depend on whether your traditional IRA includes nondeductible contributions.

If you have little additional income and enough exemptions and deductions, a small conversion may cost you little or even nothing in taxes.

But a big conversion can be expensive if the additional taxable income pushes you into a higher tax bracket and/or makes you ineligible for certain tax credits. You may be required to pay quarterly estimated taxes to meet your tax liability and avoid a penalty.

Another common inaccuracy is the assertion, and I quote, that “taxes from a Roth IRA conversion in 2010 can be split between 2011 and 2012.’’

The facts: If you convert in 2010, you can either report all the taxable income from the conversion on your 2010 tax return or report half of it on your 2011 return and the other half on your 2012 return. (You may not, as many readers believe, report one-third of the income for 2010, one-third for 2011, and one-third for 2012). The option to split the income exists for 2010 conversions only.

So, in reality, you may not have to start paying the taxes from a 2010 conversion until 2012, when you file your 2011 tax return.

Another inaccuracy is that it is the taxable income from the conversion and not the actual tax that may be split between the two tax years, said Kim Saunders, a tax analyst for Thomson Reuters.

“This seems a pretty important point to clear up,’’ an observant reader wrote. A large converted amount one year may push a taxpayer into a much higher tax bracket and result in a large tax bill that could be reduced by splitting the income. But a risk of income splitting is tax rates may go up for 2011 and 2012.

A decision on when to declare the income from a 2010 conversion does not have to be made until you file your 2010 return, Saunders said. By then, tax rates for at least 2011 will be known.

Vermont tax repeal effort draws controversy

News for our neighbors to the north.

Burlington, Vermont - February 7, 2010

As the Vermont legislature struggles to find $150 million worth of budget cuts this year, an attempt to roll back two tax increases is running into opposition. At issue are the capital gains and estate taxes, primarily affecting upper income Vermonters. But there's evidence that the two taxes are driving wealthier residents out of state to places like Florida.

The Vermont senate Economic Development committee met at Burlington city hall last week to hear testimony on repealing last year's increases on the state capital gains tax and the estate tax. Although farms were excluded from the death tax, as critics call it, the two taxes together raise tens of millions of dollars a year. And tax advisor Rick Wolfish told the panel the higher taxes are driving out high-income Vermonters.

"That is exactly what is happening," he told the panel, "that people are leaving the state. And CPAs and professionals are advising them."

Last year, the legislature lowered an exclusion on the estate tax from $3.5 million to $2 million. Tax experts say it's not just big Wall Street investors who get hit. Any Vermonter who built up a small business can get hit at anything over two-million of net assets, upon his or her death.

Wolfish said, "Under current law, if a taxpayer is considering the sale of a business, why not move to another state before the sale and pay no Vermont on the sale whatsoever?"

Real estate developer Ernie Pomerleau agreed. He said, "You know, there are people who can survive this, there are people who just say enough is enough. I can live someplace else."

Pomerleau has invested millions in Vermont development projects, creating jobs in the process. He says he'll never leave Vermont. "I'll die with my boots on here," he said. But Pomerleau said he knows others who already have left. "I know three dozen colleagues that are gone," he told the senators. "And I know you'll hear 'one comes in, one goes out.' The ones that go out have been here for forty years creating jobs, philanthropic, part of the energy of this community."

The legislature raised estate and capital gains taxes to help close a looming budget deficit as Vermont was losing 20,000 jobs along with a lot of income tax revenue. One Progressive policy advisor says the state simply cannot afford to restore a capital gains tax break. Doug Hoffer testified, "We have four years of data from when the capital gains exclusion was adopted, in those four years it cost us over $150 million. Now, the highest year was $51 million in a single year. That's a big hole to fill."

But supporters of the tax repeal say the question comes down to whether high state taxes are killing the goose that laid the golden egg. Still, the fact that the economic development committee is the only legislative committee to take up the repeal indicates how difficult that is likely to be.

Andy Potter -- WCAX News

IRS Silent So Far On New US Tax Rules For Inherited Wealth

Our trusts are drafted in such a way to account for the change, but still going to be an interesting time figuring it all out.

By Martin Vaughan, Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- The U.S. Internal Revenue Service is taking a wait- and-see approach on issuing guidance dealing with taxes on inherited wealth, unsure whether Congress will act in the next several months to change the rules again.

Advisers to the wealthy say they are left without a roadmap on a number of issues related to the disposition of assets left behind by those who have died since Jan. 1. In particular, they are looking to IRS for rules on how a new capital gains-tax regime that took effect this year will apply to estates.

"There are no forms that give us any idea how or what we are supposed to report," said Stephen Litman, an estate planner at the Minneapolis law firm of Leonard, Street and Deinard. "This leads to significant administrative challenges for families."

Congress is weighing whether to set permanent rules for taxing estates, and whether to make those rules retroactive to the beginning of this year, but such action is weeks, and maybe even months, away.

The 2001 tax-cut law was aimed at gradually eliminating estate taxes, but repeal proponents at the time lacked the congressional majorities needed to do so permanently.

As a result, the federal estate tax was repealed for 2010 only, and is scheduled to return in 2011 at rates similar to those in effect prior to President George W. Bush's tax cut legislation.

In place of the estate tax for 2010 is a capital gains tax that is levied when assets are sold. Heirs would have to pay capital gains taxes on the full appreciation in value of the asset from the time it was acquired by the deceased benefactor, a concept known in tax circles as "carryover basis."

That means that families have an additional step of searching records to establish the basis value of the asset, which was unnecessary when estate taxes were in place.

"Carryover basis rules have added another level of complexity," said Carol Kroch, head of wealth and financial planning at Wilmington Trust Corp. "Families will have to go through a more difficult process of valuing assets."

The 2010 law provides that heirs can get a "step-up" in basis, meaning no capital gains taxes would be due if the asset is immediately sold, for up to $ 1.3 million of the estate property. Surviving spouses can get a step-up in basis for an additional $3 million in property.

Families will have to decide which assets to protect from capital gains taxes with the basis step-up. For example, property that is to be sold in the near future might be a good candidate, to avoid an immediate tax consequence. It might also be wise to protect property that has been in the family for a long time, and therefore has a low basis, wealth advisors say.

All that said, Congress might pass legislation that reinstates the estate tax for 2010 and eliminates the carry-over basis rules, which would make all such planning moot.

That may explain why IRS for now is waiting for the legislative picture to come into focus.

"We are currently looking at the issues involved to determine the best course of action," said IRS spokesman Bruce Friedland.

Families generally have nine months from the death of the estate owner to file estate tax returns, so there is a little breathing room before they have to make decisions about how to allocate assets.

"I don't think anyone would be distributing assets yet," said Kroch. "Over time, estate executors will have to make a decision about how much to hold in reserve for the estate tax" in case Congress re-imposes it retroactively, she said.

Another option that is getting some discussion by congressional staff is an election that would allow the family members of people who died between Jan. 1, 2010 and when new legislation takes effect to choose between paying estate taxes, for example at the rates in effect in 2009, or the capital gains-tax regime under the current law.

As we celebrate the life and legacy of MLK

Yesterday, we celebrated the life of Martin Luther King, Jr., one of the main leaders of the American Civil Rights Movement.

Dr. King devoted all of his income and talent to the movement. He died intestate (no Will), leaving less than $30,000 in his estate. Some of that money was already earmarked for the movement.

Additional information about Dr. King’s legacy is available on NPR’s Talk of the Nation entitled The Legacy of Martin Luther King Jr