Most of you reading this are aware that since January 1, 2010 there is no federal estate tax. Some states continue to have an estate tax while the majority of states are coupled with the federal government and therefore do not have an estate tax.
Dan Duncan made an incredible amount of money as a gas pipeline mogul. He lived in Houston and when he died on March 28, 2010 his estate was estimated to be 9 billion dollars.
Many people with his net worth have done at least some estate planning – generally a little more than the traditional revocable living trust and will. Even if he did not do comprehensive estate planning permitting his family to retain the vast majority of the estate, he may have left a lot of his money to a foundation like Warren Buffet and Bill Gates are doing.
However, it is likely that the federal treasury will lose out on a lot of money. In the event that he had not done estate planning, Mr. Duncan’s estate would have had to pay somewhere in the neighborhood of $4 billion in taxes.
Now, it may not be a total loss to the federal treasury. There may be capital gains taxes that will have to be paid because of the loss of a step up in basis. I do not know the composition of Mr. Duncan’s estate.
Nevertheless, I expect that the result of Mr. Duncan’s death has people in Congress talking. Mr. Duncan’s death may have huge effects on most of us who are simply concerned with living trusts and the avoidance of probate.
For the most recent analysis of what is occurring concerning the estate tax, this article from Forbes is as good as any. I will continue to post other articles that endeavor to keep us all current.
In California we have Medi-Cal. In most of the rest of the country, it is called Medicaid. In any event, this article in the Wall Street Journal sets forth some interesting points on Medicaid.
Whether you agree that there should be or not, there are many legal strategies that can be utilized to qualify for Medi-Cal. Some of those strategies will undoubtedly be eliminated because of the budget shortfalls, but at this time estate planning attorneys, including many who prepare living trusts, wills, special needs trusts, and irrevocable trusts are familiar with them and select the most appropriate ones for their clients. It makes sense for people who think that a family member might qualify for Medi-Cal to do the planning sooner rather than later!
The vast majority of my estate planning clients are part of the more than 99% of America who has never had the need to familiarize themselves with the estate planning concept called GRAT which stands for Grantor Retained Annuity Trust. Rather, they come to my office seeking a living trust, a will, a power of attorney, and an advance health care directive.
GRATs have been extremely important to one prominent family – the Sam Waltons from Bentenville, Arkansas. You may know the name as the founder of Walmart. Mr. Walton not only founds the company, but unlike a lot of great businessman, he was keenly aware of estate planning almost from the beginning. More about him in a moment.
A GRAT allows an individual to transfer assets to a trust and receive an annuity payout for a term of years. Typically, it is a short period of time (2 to 3 years). The annuity payout is based on a government set interest rate. Today that rate is 3.2%. All of the appreciation of the asset in an amount greater than the interest rate is outside of the estate and is therefore not subject to estate taxes when the individual dies. Moreover, there is not a gift tax.
It is a form of estate planning that has almost no down side. In the event that the asset appreciates at a rate less than the rate of interest, then the individual has only lost the legal fees that it cost to establish the GRAT. Also, the individual has to live at least the length of the term of the GRAT. In the event that he/she dies before the term of the GRAT, then the assets get pulled back into his/her estate.
Now, it looks like Washington is going to change all of that. The House in the last week passed a bill that, among other things, requires the term of GRATs to be at least 10 years. This will make their benefit a lot less for older people. It is assumed that the Senate will do the same and that ultimately President Obama will sign the legislation.
Back to Sam Walton. He used GRATs to such a degree, that there is such a thing as a “Walton GRAT” that estate planners use. It is one of many reasons that he was able to pass down such a large percentage of his fortune to his children. Many other business barons have not been as savvy in their estate planning and their heirs got a smaller percentage of the estate whether it has held in trust or not and whether it had to go through probate or not.
As an estate planning attorney who works daily with clients’ and their living trusts, I frequently see clients with a fair amount of their net worth in IRAs and/or qualified plans. It is with that in mind that I discuss the following.
What the government giveth, it taketh away. In late 2008, then President Bush signed into law the Worker, Retiree, and Employment Recovery Act (WRERA) which contained a suspension of the law that requires a minimum distribution for both IRAs and defined contribution plans for 2009. It was a one year only suspension and the primary purpose of it was to not make individuals take a distribution because many of their accounts were greatly reduced due to great decline in the stock market in 2008.
Ed Slott, one of the preeminent IRA experts in the country, prepares a newsletter each month. In his April edition, he points out that the required beginning date for most individuals is April 1 of the year following the calendar year in which the individual became 70½. However, most of the time the taxpayer does not need to take a required minimum distribution until December 31 of that year.
Remember, RMDs will be based on the year-end balance of 2009 even though there was no RMD for 2009. This is true even for people who turned 70½ last year!
So says a panel of the United States Court of Appeals for the Ninth Circuit.Anna Nicole Smith died in 2007.Until the end of her life, she was seeking to be an heir of the husband that she married in 1994 when she was 26 and he was 89.
While J. Howard Marshall spent lavishly on Anna Nicole during their 14 months of marriage, his estate planning documents left his estate to his son, Pierce.Almost from the moment he died in 1995, fourteen months after his wedding to Anna Nicole, the fighting began.The widow alleged that he promised her $300 million or more.Pierce countered that the will and trust did not provide for that and 15 years later it looks like the finish line is in sight.
The panel from the 9th Circuit ruled on Friday, March 19 that Ms. Smith (and now her estate) was not entitled to any money.Her estate’s attorney indicated that it is not the end of the line.The estate may appeal to the full Ninth Circuit and ultimately to the United States Supreme Court.The Supreme Court probably will not take the case again.
It is my opinion that Anna Nicole Smith’s estate is fighting on fumes with the end being near and I think that ultimately the probate court in Houston’s 2001 ruling will stand and Anna Nicole’s Smith’s daughter as her sole heir will not receive anything from the estate of J. Howard Marshall.
The article that I have linked on estate taxes is very interesting. When I ask clients what they want to accomplish, virtually everyone says the avoidance of probate and the avoidance of estate taxes. Of course, the vast majority of couples have estates that are more than seven million dollars so generally estate taxes should not be a legitimate concern. However, if the estate tax were eliminated by law, there would be other taxes.
Yesterday TheHill.com published an article titled “Debate Over Estate Tax Likely to Wait till 2010,” which suggests that the most likely scenario for estate tax reform is a “one-year extension and then tackling the issue as part of broader tax reform next year.”
The full article is available online at http://thehill.com/homenews/senate/58665-debate-over-estate-tax-likely-to-wait-until-2010. (For those of you unfamiliar with TheHill.com, it is self-described as the publication “for and about Congress, breaking stories from Capitol Hill, K Street and the White House. The Hill stands alone in delivering solid, nonpartisan reporting on the inner workings of Congress and the nexus of politics and business.”)
Asset protection is on a lot of people’s minds.For some it may be on their minds unnecessarily.Others do not have asset protection on their minds, but should.
Who should be thinking about asset protection?
The obvious answer is anybody that has some likelihood of being sued.Thus medical doctors are an obvious group of people who need to be aware that at any time a patient could bring suit.However, it does not have to be a patient; it could also be a partner or an employee.
Another high risk field is that of builders and developers.Obviously, a project could go south because of a change in the market.Eventual owners could sue and once again partners could also sue.
People in all types of businesses and professions need to be on guard.That includes owners of apartment buildings, duplexes, or simply those who rent out a house.I know of a situation where an owner of an apartment building was sued for a lot of money because there was a shooting on the property.
We are the most litigious society in the world. As most reading this know, even businesses who serve hot coffee have to be on their toes!
Another reason to do asset protection is to protect yourself when an investment goes bad.Recently I read that the coach of the University of Michigan football team, Rich Rodriguez, was sued for $3.9 million due to a loan default in a condominium project.What makes it interesting was that the money was borrowed by a limited liability company of which Rodriguez was a partner.Ironically, one of the reasons that someone forms a LLC is for asset protection as I will discuss in a future blog.However, Coach Rodriguez, it is alleged, gave a personal guarantee, and therefore may be liable for whatever the difference is between $3.9 million and the assets in the LLC.It is true that the creditor can and probably is seeking repayment from all of the partners and not just Coach Rodriguez.On the other hand, creditors often attempt to get repaid from the easiest source(s).
In future blogs, I will discuss other reasons to do asset protection and what are some asset protection mechanisms including trusts.
