ABLE Bill Creating Tax-free Savings Accounts to Supplement Special Needs Trusts Is Expected To Pass This Year

Parents raising children with disabilities, including autism and Down's Syndrome, could soon save for their futures with tax-free “529″ savings accounts without jeopardizing their eligibility for other benefits.

The new accounts would be authorized under the Achieving a Better Life Experience (ABLE) Act of 2011 (H.R. 3423), which was introduced on November 15, 2011 in Congress with the support of Autism Speaks, The Arc, the National Down Syndrome Society and a host of other disability rights groups. The bill appears to have bipartisan support.

The ABLE Act, sponsored with bi-partisan support in the House by Congressman Ander Crenshaw (R-FL) and Congresswoman Cathy McMorris Rodgers (R-WA), and in the Senate by Senators Robert Casey, Jr. (D-PA) and Richard Burr (R-NC), would amend Section 529 of the Internal Revenue Service Code to allow individuals with disabilities and their families to deposit earnings to tax-exempt savings accounts.

The funds could be used to pay for qualified expenses, including education, housing and transportation, and would supplement, not replace, benefits provided through private insurance, employment or public programs.

Qualified disability expenses would include: school tuition and related educational materials; expenses for securing and maintaining a primary residence; transportation; employment supports; health prevention and wellness costs; assistive technology and personal support; and various miscellaneous expenses associated with independent living.

Currently, there are few options for families to save money for those with disabilities who often cannot have more than $2,000 to their name without forfeiting many government benefits. One existing option that our office specializes in is the "Special Needs Trust," which allows families to set money aside for the benefit of a person with a disability under the care of a trustee. An ABLE account would operate more like a bank account and would be less involved than a Special Needs Trust.

Special Needs Trusts will remain important tools in planning for the disabled especially since ABLE will have significant limitations once those accounts reach $100,000 (for example, disqualifying a disabled person from receiving SSI).

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney, A Partnership. For a free 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

With respect to tax and estate law issues, Hank Moravec has over 20 years' experience as one of the best Los Angeles estate and trust tax attorneys and Los Angeles Special Needs Trust attorneys and is available should you need legal advice regarding your own or a family member's situation. For a consultation, You can e-mail Hank Moravec at hm@moravecslaw.com or call him to request a consultation.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office. We can also arrange to have consultations at your home or office.

The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. There is ample free parking adjacent to the firm's office. Call (626) 793-3210.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Call

IRS Offers Filing & Penalty Relief for 2010 Estates; Basis Form Now Due Jan. 17, 20; Extension to March Available For Estate Tax Returns

Since we help our clients prepare and file estate tax returns, it is important to note that the IRS announced on September 13, 2011 that the due dates for filing Forms 8939 and 706, as well as paying the estate tax for those estates that do not elect out of the estate tax, will be extended.

The IRS announced that large estates of people who died in 2010 will have until early next year to file various required returns and pay any estate taxes due. In addition, the IRS is providing penalty relief to certain beneficiaries of these estates on their 2010 federal income tax returns.

This relief is designed to give large estates, normally those over $5 million, more time to comply with key tax law changes enacted late last year.

• The IRS is providing the following relief:
• 1) Large estates, opting out of the estate tax, now will have until Tuesday, Jan. 17, 2012, to file Form 8939. This special carryover basis form, required of estates making this choice, was previously due on Nov. 15, 2011. Because this is a change in the specified due date rather than an extension, no statement or form needs to be filed with the IRS to have this new due date apply.
• 2) 2010 estates that request an extension on Form 4768 will have until March 2012 to file their estate tax returns and pay any estate tax due. Normally, a six-month filing extension is automatically granted to estates filing this form, but extensions of time to pay are granted only for good cause. As a result, most 2010 estates that timely file Form 4768 will have until Monday, March 19, 2012 to file Forms 706 or 706-NA. For estates of those dying late in 2010 (after Dec. 16, 2010 and before Jan. 1, 2011), the due date is 15 months after the date of death. No late-filing or late-payment penalties will be due, though interest still will be charged on any estate tax paid after the original due date.
• 3) Special penalty relief is provided to many individuals, estates and trusts that already filed a 2010 federal income tax return, or obtained an extension and plan to file by the Oct. 17, 2011 extended due date. Late-payment and negligence penalty relief applies to persons inheriting property from a decedent dying in 2010, who then sells the property in 2010 but improperly reports gain or loss because they did not know whether the estate made the carryover basis election. Details are in Notice 2011-76 posted on the IRS website.

• Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney, A Partnership. For a free 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.
  
  With respect to tax and estate law issues, Hank Moravec has over 20 years' experience as one of the best Los Angeles estate and trust tax attorneys and Los Angeles probate litigation attorneys and is available should you need legal advice regarding your own or a family member's situation. For a consultation, You can e-mail Hank Moravec at hm@moravecslaw.com or call him to request a consultation.
  
  The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office. We can also arrange to have consultations at your home or office.
  
  The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. There is ample free parking adjacent to the firm's office. Call (626) 793-3210.
  
  The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Call (818) 769-4221.

IRS May Seek Gift Tax Returns from Donors to GOP Leaning 501(c)(4)s

The IRS confirmed May 13 that it is examining donations to one or more Section 501(c)(4) organizations to determine whether the donors should have paid the federal gift tax on the donations.

The development has shocked some tax lawyers, who have been advising clients for decades that donations to 501(c)(4) "social welfare" groups—including those that get involved in political and issue-advocacy campaigns—routinely are not subject to the gift tax.

Stay tuned. If the IRS takes the position that the donations are taxable gifts, there will surely be a battle that will spill into the Federal courts. Donations to 501(c)(4)s are not characterized by the "disinterested generosity" that is required of a gift for transfer tax (estate and gift tax) purposes.

Internal Revenue Code Section 501(c)(4) exempts from tax "civic leagues...operated exclusively for the promotion of social welfare...."

It will probably be high profile Section 501(c)(4) groups that will be targeted for audit. High profile Section 501(c)(4)s include Crossroads GPS, an organization that opposes President Obama's agenda and became a force as a fundraising juggernaut in the 2010 elections. Others include Priorities USA; Americans For Tax Reform; and Americans For Prosperity, a group fronting special interests started by oil billionaire David Koch. People For The American Way is a prominent left wing 501(c)(4).

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney, A Partnership. For a free 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

With respect to tax and estate law issues, Hank Moravec has over 20 years' experience as one of the best Los Angeles estate and trust tax attorneys and Los Angeles probate litigation attorneys and is available should you need legal advice regarding your own or a family member's situation. For a consultation, You can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221 to request a consultation.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office.

The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. There is ample free parking adjacent to the firm's office.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878.

Tax Relief Act of 2010: It Finally Happened

Well, no one would have predicted this!

Essentially, Congress had ten years to provide some certainty to the U.S. Federal Estate and Gift tax system. Incredibly, with the Democratic Party in control of both houses of Congress and the White House, the Estate tax was allowed to lapse completely in 2010. As 2010 wore on, there were periodic statements of what should happen to the law, should there be a retroactive bill? Would the law really be allowed to return to the 2001 standard, with high rates and only a $1,000,000 exemption?

Then, the mid-term elections occur and we have divided government again. Yet now, with a technical "lame duck" congress, incredibly, a new tax bill emerges!

And what a bill! In addition to extending the Bush tax cuts on the income tax side (along with some very interesting temporary adjustments to the Social Security withholding tax), the Tax Relief Act signed into law on December 17, 2010, lowers estate, gift and generation-skipping transfer (GST) taxes for a two-year period.

Here are some of the estate and gift highlights of the Act:

■ The estate tax will be reinstated for 2011 and 2012 with a top rate of 35 percent. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years.

■ Estates of people who died in 2010 can choose to follow either 2011 or 2011's rules. The estate may choose between an estate tax based on the $5 million exemption and a step up in basis of the estates assets, or no estate tax and a modified carryover basis in the estates assets.

■ For gifts made after December 31, 2010, the Act reunifies the gift tax with the estate tax, allowing for an exclusion of $5 million and the 35% tax rate. For gifts made during 2010, the exclusion amount is $1 million and the maximum tax rate is 35%.

■ The generation skipping transfer tax exemption for gifts made or decedents dying after December 31, 2009 will be equal to the applicable exemption for estate tax purposes. Transfers made during 2010 subject to the generation skipping transfer tax are subject to a tax rate of 0%, and will be subject to a rate of 35% for transfers in 2011 and 2012.

■ In addition, the TRA allows for the estates of decedents dying after December 31, 2010 to elect to transfer the unused portion of the $5 million exclusion to a surviving spouse.

Aside from the fact that a $5 million estate tax exemption per person, or $10 million per couple, is good news, there are many other planning opportunities raised by this new bill, many of which are caused by the fact that the gift tax exemption will now also be $5 million per person. This is the huge difference between the law since 2001 and now. Under prior law, with the gift tax exemption at $1 million, many clients who could otherwise afford to do so (from a financial perspective) could not make gifts to children or grandchildren. Now, there are many gifts which can be made, in trust or otherwise, and the parent/donor will not owe tax.

Perhaps the most surprising part of the Act is that estates of people who died in 2010 can elect to use either the new rules or the "old" rules. This addresses the situation in which an estate may owe significant capital gains tax even though no estate tax is owed. This is a surprising change because many times such inconsistencies are allowed to remain in the tax code because there is not much in the way of political capital to simply fixing an inconsistency. We have several estate matters which will be affected by this part of the Act.

The fact that the Act is in place for only two years is interesting. Perhaps Congress has realized that having these "deadlines" in place actually helps when it comes to compromise. We will see in two years' time.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Probate Litigation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his offices are conveniently located for clients in the Los Angeles, Orange, Santa Barbara, Riverside and San Bernardino Counties.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office. The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Telephone: (818) 769-4221.

LEGISLATIVE UPDATE -- Odds On No Action On Estate Tax This Year Just Went Through The Roof

Its October 1, and there is still no action pending on Federal Estate Tax this year. Based upon several well publicized remarks, including a speech by Charles Grassley on the floor of the Senate and an op-ed piece by Robert Rubin in the Wall Street Journal ("Bring Back The Estate Tax Now"), it is fair to say that, with one quarter left in 2010, policymakers have finally noticed that the tax is coming back at only a $1 Million exemption and a 55% rate next year.

With an election looming in a month, there is basically no chance of action prior to Mid-November, I think that any retroactive application is now over.

I also think that a return to the $3.5 Million exemption and 45% rate is now the most likely scenario, because the government needs the money and has to get it from somewhere.

In an October 2, 2010 New York Times article entitled "TARP Bailout to Cost Less Than Once Anticipated" there is a good opportunity to imagine, as a legislator, (or even a top aide, like all those guys and gals in "The West Wing") how you would (a) address this issue and more importantly (b) explain it to your constituents.

It is no easy task. The New York Times article mentioned above, for example, points out that, according to one poll, 3 out of 10 voters are against the"bailout" even though the bailout is not going to cost $700 billion and may actually make money for the government. In another New York Times article "In Tax Cut Plan, Debate Over the Definition of 'Rich'" (Sept. 30, 2010) is a very thorough dissertation on one of the major issues in tax policy -- who, exactly, are "the rich?"

The only thing missing is the one fact which is rarely discussed, tax policy must address distribution of whatever it is that is being taxed. (It is rarely discussed because it is not entertaining enough, that is for sure!) For example, imagine an economic system with one peasant who is only paid in food, who works for the farm owner. The farm owner, who is "only 50% of the population" pays "100% of the taxes." He pays 100% of the taxes because he makes 100% of the income. The U.S. economy is more complex than that, but the principal is the same, in order to raise money you have to levy taxes on actual streams of income or assets -- you cannot just tax "in theory."

So, now read the two articles and figure out the best solution. (I know I don't know the best solution, that is for sure!) Remember, these are the guidelines:

(i) if you actually apply the taxation to those who have the money, you are vulnerable to the argument that "so and so voted to have 5% of the population pay 37% of the tax";

(ii) you know the average voter basically does not like rich people, since a program to essentially stabilize one of the worst recessions in memory is thoroughly demonized even though it may actually be profitable for the taxpayers, basically on the grounds that people don't like banks; and

(iii) no one agrees on who the "rich" are -- at least no one agrees based on any logic.

Good luck. And if you ever wonder why the Internal Revenue Code is complicated, or why politicians only speak in sound bits with no substance, imagine trying to explain these considerations in 30 seconds.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Probate Litigation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his offices are conveniently located for clients in the Los Angeles, Orange, Santa Barbara, Riverside and San Bernardino Counties.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office. The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Telephone: (818) 769-4221.

N.Y. Times Article On Family Limited Partnerships In Estate Planning - 5 Basic Issues To Avoid I.R.S. Scrutiny

The New York Times recent article "Partnerships May Aid Your Estate, But The I.R.S. Is Watching" is a short but interesting read for those interested in how family limited partnerships are used to reduce the size of an estate for tax purposes and how the I.R.S treats them.

Family limited partnerships can help keep family interests in sync after death and protect their estate from a high tax bill, but the government wants to make sure they operate as true businesses, not solely to avoid estate taxes.

Apart from other business reasons, family limited partnerships are often used to reduce the size of an estate for tax purposes. What makes them attractive is that the value of whatever is in the partnership — buildings, a business, publicly traded stock — can be discounted because selling shares in a partnership to outsiders is difficult since all the partners are related.

The article addresses whether or not a family limited partnership stand up to the I.R.S. test. The article is a basic summary of a complex area of law. The article suggests discussing five basic issues.

1. WHY DID YOU SET IT UP? Do you have a legitimate business interest beyond lowering estate taxes because you can discount the value of the assets in them? If it is solely estate tax discount driven, there could be a problem with the I.R.S. Examples of legitimate business interests are (a) jointly managing the collective wealth of a family to gain access to better managers, and (b) operating an illiquid asset like a family business or a portfolio of buildings. The article notes that a "family can also use a partnership as a stealth prenuptial agreement since all the assets are wrapped up in the partnership and not easily dividable."

2. DID YOU DISCOUNT THE PARTNERSHIP TOO DRASTICALLY?

If you discounted the value of the partnership too drastically, the I.R.S. may not agree. The article quoted one expert that "the I.R.S. had seemed to settle on a discount of 25 percent in cases it had litigated." One problem noted in the article is that the I.R.S. has not given strict guidance on what you can and cannot do.

3. WHEN DID YOU SET IT UP? Was the partnership set up on a parent's deathbed? This could draw scrutiny. The Times cited one case involving the $10 million estate of Albert Strangi, a Texan who made his money in manufacturing and was in declining health when his son-in-law moved nearly all his assets into a family limited partnership. After seven years of litigation, the federal courts ruled that the partnership had been set up solely to avoid estate taxes. With such an I.R.S. ruling, the whole amount could be deemed a taxable gift. This Texas case is an extreme example, but it helps point out that timing as well as intent count.

4. HOW DO YOU MAINTAIN IT? For a family limited partnership to seen as legitimate, it needs to be run as a true business. This means regular meetings and audits as well as professional distributions. If you fail to do this, it can invite I.R.S. attention.

5. WHAT DO YOU DO WITH IT? Beyond tax reasons, many partnerships are set up out of a legitimate interest to keep families together after the parents die. But this is not always what the heirs want, particularly when they do not like one another. A partnership can be unwound, but how easily depends on how it was set up and cared for.

Many of the problems described above could be avoided by talking to lawyers at the formation and over regularly time periods to see if the partnership is being run properly. For example, during the formation stage it would be a good idea to address the issue of succession. Partnerships can be a useful estate planning tool but clients need to be very careful about how they’re setting up partnerships. The devil is really in the details.”

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

Mr. Moravec is a very experienced Los Angeles estate planning attorney, Los Angeles trust attorney and Los Angeles tax attorney. He has more than 20 years' experience in estate planning and is extremely dedicated to his clients and helping them create a plan that is tailored to their wishes, finances, helps avoid probate and taxes, and takes into account their families' unique situation.

He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Probate Litigation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his offices are conveniently located for clients in the Los Angeles, Orange, Santa Barbara, Riverside and San Bernardino Counties.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office.

The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Telephone: (818) 769-4221.

Tax Season Is Here: Estate Planning And Tax Issues

As we head into the fall, Tax Lawyers and Accountants know that this time of the year, more so than the spring April 15 deadline, is really Tax Season -- the time when Congress typically passes new law to be effective the following year.

This "Tax Season" is especially interesting (well, it's "interesting" if you follow tax laws for a living) since (i) many general provisions of the pre-9/11 2001 Tax Act are set to expire at year end, and (ii) among those provisions is the Federal Estate Tax, currently repealed but set to return at a very low exemption amount $1,000,000 per person. Throw in a weak recovery from a recession and a fairly serious Federal Deficit (and, for us in California, what can only be described as a continuing budget crisis), and there is a lot of potential for laws which could effect large swaths of taxpayers in a material way.

Of course, its also a mid-term Congressional election year, which means both parties will be due to issue "highly tactical" if not always "technically accurate" statements about tax law.

Here is a short list of what might make the front page of the papers this fall:

1. At what rate will the Estate Tax return? With so much of the year gone by, the odds of any sort of retroactive tax appear to drop by the day. However, Congress may be tempted to simply let the law switch back on January 1st, and if that happens a $1,000,000 exemption will mean that many taxpayers who did not have to concern themselves with Estate Taxes at all will need to do so.

2. Will income tax rates return to something approaching Clinton-era rates? For taxpayers in the top bracket, this means about a 4 to 5 percent increase. The debate about whether that should or will happen would require quite a bit of space (maybe a couple of blogs?) but what it may well mean is that if there is an opportunity to take income this year as opposed to next year or later, the savings could be material.

3. Will the Social Security and Medicare tax rates change? There is no area of tax more misunderstood than this one, mainly because neither political party has any interest in boring taxpayers with the actual details when so many votes can be had by getting everyone fired up with policy debate.

The fundamentals are:
(i) Both programs are more than 70 years old,
(ii) for the first 40 or so years, they were "pay as you go" the rates of tax were based on the payouts of the programs on an annual basis,
(iii) in the mid 1980's it was decided that workers should be, essentially "over charged" to build up a "reserve" for the baby boom generation bulge.

I put "over charged" and "reserve" in quotes because both terms are highly subjective, the reality is that if Social Security paid out $X since 1985 all of the taxpayers were charged about $2X during that time. Why? Well, this excess did not technically go into a big mattress, but went to basically reduce overall Federal Government borrowing (i.e., we own less to China and more to "ourselves").

So, when anyone says "the Social Security Trust fund will run out" it actually means that general tax revenue will need to start paying back the excess revenue borrowed since 1985. This is sometimes portrayed as a disaster, but in actuality its about what the Iraq occupation has cost. This will not happen in the short term (i.e., this fall), but there are going to have to be some adjustments somewhere in the system, and the information given to taxpayers is going to be far from the basic facts needed to make an informed decision -- it's just too easy to demagogue this issue.

4. Will California adjust its own taxes at some point? We don't talk about State taxes much, especially since California does not have a separate Estate Tax. However, with the state budget crisis seeming to persist year after year, how long will it be before California considers it?

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Probate Litigation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his offices are conveniently located for clients in the Los Angeles, Orange, Santa Barbara, Riverside and San Bernardino Counties.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office.

The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Telephone: (818) 769-4221.

L.A. Times Opinion Article Favors Congress Passing Estate Tax This Year

The estate tax is controversial and the fact that it is not settled is making it to the opinion page of the nation's leading newspapers including the Los Angeles Times. This article by Boston law professor Ray Madoff entitled "Inherited Wealth Shouldn't Get A Free Pass On Taxes" argues that the wealthy should pay estate taxes. As estate lawyers, we seek to minimize all taxes to our clients and plan for the avoidance of taxes.

Nevertheless, it is important to keep up with the issues even when we may disagree with the views expressed in this article. Professor Madoff does not address the fact that taxes have already been paid on the income earned by the wealthy but this is his opinion on inherited wealth passing to the next generation. The article addresses the amount of money generated by the estate tax. Opinions such as this one and the current federal budget crisis are some of the reasons why we believe that Congress will act and pass an estate tax within the next year.

Inherited wealth shouldn't get a free pass on taxes - latimes.com

Posted by Henry (Hank) J. Morevec III. With respect to tax and estate planning, Hank Moravec has over 20 years' experience as one of the best Los Angeles estate and trust attorneys and is available should you need legal advice regarding your own or a family member's situation.

For a free 30 minute consultation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 to request a consultation. The firm website is http://www.moravecslaw.com/. The firm is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. There is ample free parking adjacent to the firm's office.

Planning For Dormant Estate Tax In 2010. What Happens In 2011? Why You Need To Seek Advice And Have Estate Plan Updated.

One reason I like to refer to articles in newspapers is that it helps explain to non-lawyers what is happening in estate and tax law. It also helps remind people when they need to engage in estate planning. The New York Times' article on June 12, 2010 is informative and is entitled "Confusion Over The Dormant Estate Tax Keeps Advisers Busy."

Why might you need to consult an experienced California estate planning attorney?

1. If Congress fails to act again this year, the estate tax laws next year will revert to their levels before 2001 which is $1 million.

This means that if you set up your estate prior to 2010 on the assumption that estates worth more than $1 million but less than $3.5 million or more would not be subject to estates taxes upon death will need to revisit their estate plan.

If the law stays the same and Congress does not act, the heirs of a single person who dies next year with more than $1 million would be subject to a 55 percent tax. (For couples, it is $2 million.) Heirs of that same person, with a $3.5 million estate, would have paid nothing in 2009 but could pay as much as $1.375 million in 2011, depending on the level of planning. The numbers speak for themselves.

2. How Can My Estate Be Worth Over $1 Million?

In California and the Northeast, the value of a home combined with retirement accounts means that a large percentage of the upper-middle class can have estates worth over $1 million (or $2 million for couples).

Estate planning can save a great deal of money and the cost of planning (flat fees in our office ranging from $3,500 to $5,000 for most estates) is minor compared to the savings in estate tax. See our prior article about "What Does Estate Planning Cost?"

3. Some wealthier clients are interested in creating grantor retained annuity trusts (GRATs) which is a short-term trust that allows people to pass money to heirs tax-free. There is a concern that the federal government could change the terms of these trusts. See our prior article about GRATs and other ways of transferring wealth.

4. For 2010, elimination of automatic step-up in basis requires determining the original purchase price and waiting for IRS to issue documents on how to apply artificial step-up in basis.

As discussed in other articles, in 2010 the automatic "step-up" in basis for capital gains tax purposes was also repealed. Here is a brief explanation of how this works. Prior to 2010, the assets of people who died under the old estate tax law were valued at the date of their death for tax purposes. For example, any capital gains on stocks purchased 20 years' earlier — which would have been subject to tax if sold — were erased. In 2010 that is no longer the case, and figuring out what is owed requires determining the original purchase price — however long ago that was.

Without an estate tax this year, the Internal Revenue Code grants an artificial step-up in basis, as it is called, of $1.3 million to be used at the executor’s discretion and $3 million on assets passed to a spouse. The problem is that the IRS has yet to issue documents or forms to record how this exemption has been applied.

For an estate where the deceased passed away in 2010, the tax would not be due until April 15, 2011. However, a problem could arise, for example, if the heirs need to sell stock for cash or to diversity holdings. The sale can be made but the heirs would incur a 15 percent capital gains tax on the appreciated amount.

The New York Times article gave one example showing how not having an automatic step-up in basis could affect property. For example, if an heir inherited a property worth less than $3.5 million (the 2009 exemption) but worth more than the $1.3 million (with a basis near zero) that the IRS step-up in basis would exempt -- there is a large difference between the taxes owed in 2009 and 2010. For a 2009 sale, there would have been no estate tax or capital gains tax owed. But if the property is sold in 2010, capital gains tax would be owed.

5. What do estate planning attorneys want to happen?

I cannot speak for others, but I (and most others I believe) want predictability and certainty in what the tax laws are going to be in 2010 and afterwards. Previously, it was predicted that the estate tax would be enacted retroactively but that has not occurred and may not. Given that the first billionaire has passed away in 2010 and has saved his estate an enormous amount of money, the IRS may not want to litigate against his estate which could easily outspend the IRS.

For the heirs middle-upper class who are moderately wealthy due to property and retirement plans, they will pay significantly more unless Congress acts to change the law. People who would not have had to worry about estate tax will need to plan if Congress changes the law or if Congress allows the tax to revert to 2001 rates.

6. What should I do if my estate is worth more than $1 million (or $2 million for couples)?

You can do a couple of things. First, have your estate plan updated before the end of 2010. There may be gifts and other estate planning vehicles available to you this year.

Second, watch what Congress does and plan to have your estate plan reviewed again in 2011. Depending on your net worth, the types of assets you own and your intended beneficiaries, it might turn out that you will not need the 2011 return visit — but we won't know until Congress acts or fails to act.

Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation. He has over 20 years' experience as one of the best Los Angeles estate planning attorneys and one of the best Los Angeles probate attorneys with an excellent tax law background and is available should you need legal advice regarding your own situation.

You can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 to request a consultation. The firm website is http://www.moravecslaw.com/. The firm is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108.

Estate Planning & Annuities: Should Parents Take Smaller Monthly Payments So Survivors Can Receive Some Sort Of Inheritance?

On February 20, 2010, the Wall Street Journal's online edition has an article entitled "A Tough Choice: Your Or Your Kids." The article discusses the dilemma some families face when buying an annuity: Should a parent take smaller monthly payments so that their surviving spouse or children can get some sort of inheritance?

Each person or family's situation is different but the article has several interesting points that can be considered.

1. Have your financial planner work with your estate planning attorney when deciding on how to structure annuities, whether to have a fixed or variable annuity, whether to pair the annuity with an insurance policy and/or whether to purchase riders to guarantee payments for your heirs.

Often times without the input of an estate planning attorney, most people opt for the smaller payment without considering other and possibly better strategies to help the heirs come out ahead, including pairing an annuity with an insurance policy.

2. Pairing an annuity with an insurance policy. The WSJ article gave the example of a certified financial planner who advised an 80-year-old client to use the $266,000 value of a variable life-insurance policy to buy an immediate annuity, providing her with $2,500 a month for the rest of her life. The mother is using $1,500 a month from that $2,500 payment to buy a guaranteed life-insurance policy worth $300,000. Now her son stands to inherit more than the annuity's cost.

The WSJ article gave another example of pairing an annuity with an insurance policy to hedge against inflation. Let's say you and your spouse have $1 million saved at age 65 from which you hope to pull 4% a year. You could spend $185,000 to buy a second-to-die permanent life-insurance policy with a $1 million guarantee that would eventually go to your children. And with about $800,000, you could get an immediate inflation-indexed annuity that would pay $40,750 the first year and continue paying through both spouses' lifetimes.

3. There are two main types of annuities, each usually starting with a lump-sum payment. With variable annuities, you invest in stocks or bonds with an insurance guarantee. There usually are surrender payments if you withdraw the money in the first few years. With immediate fixed annuities, your lump sum buys regular payments from an insurer for the rest of your life. They are being hailed by everybody from financial planners to President Barack Obama as a way for Americans to stretch their retirement nest eggs.

4. Riders to guarantee payments for your heirs or to adjust monthly payments for inflation. Annuities come with complex features and fees that are often not found in investments like mutual funds. It takes careful analysis to figure out if an annuity makes sense for you and, if so, which features to purchase.

When one spouse has health problems and the other could live a long time, variable annuities with guaranteed-minimum payments can pay off, despite annual fees that can top 3.5% of the invested amount. The WSJ gave an example of a 69-year-old retired teacher whose husband died last year from post-polio syndrome. The couple was drawing 6% a year from a variable annuity in which they had invested $300,000. The investment had lost half its value during the financial crisis, but the retired teacher inherited the original amount invested because of a guarantee they had purchased. The money should still be there for her two daughters as well.

5. Immediate fixed annuities are simpler to understand and cheaper: You get a regular payment for life. But when you die, the downside is that your family loses that payment unless you pay extra for a rider returning at least some of the money you invested. The rub is that such a rider will typically lower the monthly payment you receive by anywhere from 2% to 15% or even more.

6. The WSJ article suggested an approach for buying an annuity that involves determining one's basic expenses—utilities, food, taxes, insurance and so on. Purchase a plain-vanilla annuity to cover those costs. Then you can invest the rest of your savings to spend on vacations, cars or grandchildren. Anything left over can be your family's inheritance. As the article pointed out, however, if you are early in retirement, who knows how much the basics will cost in 20 or 30 years? And what if your savings barely cover an annuity that will pay for those basics?

7. As annuities gain in popularity, make sure you consult with an experienced estate and trust lawyer as well as with your financial planner before you purchase the annuity so it is consistent with your estate plan and wishes for providing for your heirs.

Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation in San Marino, California, a suburb of Los Angeles. He is a very experienced estate planning attorney. Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

Some States Race To Clean Up Congress' Estate Tax Mess:

With the federal estate tax law having lapsed — a growing number of states are taking matters into their own hands.

"Investment News" has an article on this topic which I have linked this post to and it can be found here:

Dead Federal Estate Tax Rises From The Ashes - Investment News

The article discusses how lawmakers and estate attorneys in the District of Columbia and at least 13 states, including Florida, Georgia, New York and Virginia, are drafting or have introduced legislation aimed at clarifying estate tax law in the absence of a federal statute. Specifically, they hope to avoid a wave of lawsuits that will likely arise from ambiguities in wills and trusts filed this year.

For example, here's the way it would work. On Jan. 12, Virginia introduced a bill that would require all estates and trusts to be treated as though they were governed by 2009 federal tax law. I have not seen any proposed California legislation yet.

For those who want more related information on this issue, you can read a February 3 Forbes Magazine article entitled "States Race To Clean Up Congress' Estate Tax Mess."

Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation in San Marino, California, a suburb of Los Angeles. He focuses his practice on Estate Planning, Probate Litigation, Trust Administration, Beneficiary Representation, Trustee Representation, Tax Law, and Nonprofit Law.

Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

Tip Of The Week: You May Need To Alter Will

The Wall Street Journal's article on January 17, 2010 is entitled "You May Need To Update Your Will." The article relates to what I have written about this month - the recent repeal of the federal estate tax for 2010 and the uncertainty of when, how and whether Congress will pass a retroactive law.

The article is educating its readers on how the recent repeal of the federal estate tax could have one consequence families may not be aware of: some people who do not update their wills could end up leaving nothing to their spouses.

The reason this could happen is as follows. It is a common practice for people to use formulas in their wills designed to send the maximum amount of assets not subject to the estate tax into a trust, often for their children. The remaining assets are usually left to the surviving spouse.

But at this moment in 2010, there is no limit on the assets people can pass to their heirs without being subject to federal estate tax. So there are some wills and trusts where all of the assets could go into a trust and the surviving spouse would get nothing.

There is some relief for these spouses if wills are not updated since most states allow a surviving spouse to claim part of the estate even if he or she has been disinherited. However, this can be an expensive court process.

To avoid potential problems, people should review their wills with their estate planning attorney and determine if they need to revise their wills. For those people who left all assets to the trust without any to the spouse, it may be appropriate to remove the formulas and use dollar amounts instead to designate where assets should go. Another idea to consider is whether to transfer some assets to a spouse now, so he or she has sufficient funds directly in his or her name.

There are numerous planning tools - and each individual situation is different. Once the law is passed and retroactive -- as is predicted by me and most estate planning experts -- the will will need to be revisited once again. Remember to set up everything as if you would die tomorrow. Procrastination in this area can lead to many unintended consequences.

Posted by Henry Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation in San Marino, California, a suburb of Los Angeles. He focuses his practice on Estate Planning, Probate, Trust Administration, Beneficiary and Trustee Representation, Tax Law, and Nonprofit Law.

Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

NYT Article: "A Bizarre Year For The Estate Tax Will Require Extra Planning"

Given the uncertainty in the estate tax this year which I have written about previously, estate planning may require new strategies for various wealth levels.

Paul Sullivan has authored an article in the January 8, 2010 New York Times entitled "A Bizarre Year For The Estate Tax Will Require Extra Planning." This article is a good summary of current thinking on this issue and includes some common sense advice such as having one's will and estate plan reviewed in these uncertain times.

The consensus among estate planners is that Congress will revive the estate tax and make it retroactive to Jan. 1, 2010. As the New York Times article noted having an expired estate tax is unsettling since "[t]he situation has thrown a wrench into the core tenet of estate planning: set up everything as if you would die tomorrow. What happens if the law changes by then?" This is the question all of us should ask ourselves.

The article gives one excellent example using the gift tax. Presently, the gift tax is down to 35 percent, from 45 percent, and the generation-skipping tax on assets passed to grandchildren is gone. In 2009, if a wealthy businessman wanted to give his granddaughter a gift above the exemption, he would have paid an effective tax of 74 percent on that amount. This year, the grandparent would pay only the 35 percent gift tax.

No one wants to be a test case and this uncertainty can be used as a reminder for all of us to take a look at our estate plan and wills and pay attention to the anticipated legal changes.

Posted by Henry Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation in San Marino, California, a suburb of Los Angeles. He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Tax Law, and Nonprofit Law.

Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

Congress Has Adjourned Without Making Changes In Estate Tax Law: Evaluating Your Estate Plan

Congress has adjourned for the year without making any changes in that tax law. Statements have been issued to the effect that the Senate will take up Estate Tax reform in early January, so the issue is still up in the air.

It seemed incredible that Congress would allow some unknown number of days to elapse in January of 2010 during which there would be "no estate tax" yet pass a retroactive bill later.

The concept of "retroactive tax law" is not a strange one, it actually happens almost every year. Most of the time, though the "retroactive" laws apply to the income tax, and such bills benefit taxpayers. This year, there are a significant number of deductions which expire on December 31, 2009 and have not been extended to 2010. Most are expected to be extended "retroactively" sometime in the first quarter of 2010, but most people will pay no attention.

Similarly, at the level of tax regulations (one step below actual statutes or, to put it another way, at the level of "interpretation" of existing statutes) it is common for the Treasury Department or the IRS to issue a formal Notice which states, for example that the tax consequences of a certain type of transaction are under review. Later, often several months to more than half a year later, actual regulations are issued which apply to transactions which occur after the date of the formal Notice.

But the Federal Estate Tax is not a regulation, it's an actual statute, and to politicians on both sides as a concept it appears to draw a strange mix of importance and casual disregard. For example, in early December, the House of Representatives passed an Estate Tax Bill which provides that the current law would remain in effect. The House could have included this bill as part of a mandatory Defense Funding Bill (which I understand had to be passed in 2009) but, apparently because the House figured that the Senate was busy with Health Care, decided not to do so. So it's important enough to pass a bill, but not important enough to actually get it done before the end of 2009.

If it's considered funny, at some level, to make fun of heirs who are greedily waiting for an inheritance, the concept of no estate tax for a defined period of time takes this area of "humor" to a whole new level. The jokes are already starting to flow, at the Huffington Post, Steven Clifford weighs in with a list of things that parents ought to take a second look for now that there is no estate tax in a couple of days, including children removing the steering wheels on their cars or sending texts to parents while the parents are driving.

So as of now, the law remains that the tax will disappear in 2010 before reverting in 2011 to the old rate of 55 percent for estates worth more than $1 million. Thus, if Congress does not act, the repeal is only for 2010. After that, the tax is to be reinstated at pre-2001 levels.

Today, the estate tax applies to estates that are worth more than $7 million (for couples), or $3.5 million (for individuals). More than 99 percent of all estates are exempt. In addition, under today’s law, when heirs sell inherited property, no capital gains tax is due on the increase in value that occurred during the lifetime of the original owner. (If your parents pass on stock worth $2 million that they bought for $200,000, and you sell it for $2 million, you owe no tax on the $1.8 million gain.)

But the big issue today is not the status quo, its retroactivity, what it means, and how it would work. An estate does not have to file an Estate Tax Return and pay the estate tax until nine months after a person’s death. The Senate could wait, then, until the summer to decide on the estate tax and make it retroactive to the beginning of the year.

This does not mean retroactivity will be easy to navigate. Many estate plans name individual relatives (i.e., non-accountants, non-tax lawyers, and certainly "non" Trust Companies) as the executors of Estates or the Trustees of Trusts. Most, if not effectively all, of these individuals are unaware of their personal liability for estate taxes owed. It's almost a statistical certainty that some individual trustee will try to distribute all assets to "beat" the enactment of any law, only to discover that when the law is passed later that they have liability.

It will be an interesting January.

Posted by Henry Moravec, III. Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

House Bill Extends Current Estate Tax - Will Legislation Make It Through Senate?

With a year-end deadline approaching, the House moved to prevent a repeal of the estate tax from taking place next year, voting instead to approve a permanent extension of the current levy.

But the legislation may not make it through the Senate. That means the tax could lapse entirely next year, based on the provisions of Bush-era legislation.

The House bill exempts the first $3.5 million of an estate, or $7 million for married couples, and taxes inherited wealth above that at 45%, the same as the 2009 rate. It passed by a vote of 225 to 200, largely along party lines, with most Democrats in favor and Republicans in opposition.

If the legislation isn't completed before January 1, the estate tax would vanish in 2010, which is how the Bush-era tax cuts were designed to work. If the matter remained unaddressed, the tax would return in 2011 at the old Clinton-era rate of 55%.

In 2001, when the current law was adopted, Republican demands for a permanent repeal were beaten back by concerns over the deficit, forcing them to settle for a one-year repeal instead. This is why we are facing this issue now.

As an estate planner, I do not like the potential for wild swings in tax rates. A permanent resolution of this tax issue by the House would allow families and business owners to plan with certainty rather than this unusual and unpredictable tax policy that has been in effect since 2001.

Posted by Henry Moravec, III. Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

The Swiss Connection and FBAR

At the top of the list of current events in Washington these days is the just announced UBS settlement, where some 4,000 names of U.S. citizens with Swiss bank accounts will be disclosed to the Internal Revenue Service. This settlement raises some fascinating issues of public policy and how it is always what you don't know about the Internal Revenue Code that hurts you.

As the comments to yesterday's New York Times article on the settlement revealed, there is quite a bit of anger among people who think that others may be evading taxes. However, I suspect that a good number of the people who have these Swiss accounts are not captains of industry but relatively ordinary people seeking some international diversification who may now be caught up in the enforcement plan described below. As you will see, although taxpayers are in theory offered a break if they engage in voluntary disclosure, the penalties, like many in the international trust and account area, are fairly severe.

As a bit of background, it is common for clients who engage in estate planning to inquire about foreign accounts and foreign trusts. After all, who has not seen The Bourne Identity and imagined himself or herself showing up in Zurich with money already waiting? However, the reality is that the United States is not Belgium or some other small member of the European Union, where the majority of citizens may have business dealings in other countries. U.S. tax law has never approved of U.S. taxpayers moving money or assets offshore, and because of the size of the United States it is not common for people to need to do so.

Somewhat less common are clients with foreign business interests or dual citizenship, who maintain residences in foreign countries and bank accounts there. Typically, these clients already have good accounting advice which helps them navigate filing obligations in two countries. In some cases, we even have to examine the applicable Estate Tax Treaties while drafting their documents.

Set against this background of a country where the vast majority of citizens have no foreign financial interests at all, you can see why the initial reaction to the UBS settlement might be "track down every last one of those rich guys!" But some people, who are not actually very rich, may be in for a big shock.

Most people don't give it much though when they get their annual Form 1099s from their banks and financial institutions. You simply attach them to your tax return and file it. However, those forms are of course also disclosed to the IRS, and it then uses them to cross check the income reported on the return. U.S. banks however, would usually have no way of knowing whether a customer was a dual citizen or resident and had a filing requirement in another country, or what that filing requirement would be.

This is why a knee jerk reaction to the "secretive Swiss banks" is a bit off the mark. Even though a large amount of the money in Swiss banks is from people or companies who are not Swiss, its not up to the Swiss to report to the IRS, is up to the taxpayers.

If a taxpayer reported the income from their Swiss accounts on their form 1040, they are sleeping through the night these days. They may even have gotten a credit for taxes paid in Switzerland.

However, many ordinary, non-sophisticated-secret-agent-types might not have known about the U.S.'s foreign account equivalent to the 1099, the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (the "FBAR" for short). Its a simple form, but because it does not apply to the vast majority of U.S. filers, it is not filed with a Form 1040 income tax return, but is filed separately to a separate IRS department dealing with foreign accounts.

Perhaps the worse case to be in is if you had a foreign account, did not disclose the earnings (because perhaps you thought the foreign withholding was the only tax owed) and did not file the FBAR.

Then, you have until September 23, to file the FBAR and pay the tax, an extra 20% of the tax, interest on both, and another penalty of 20% of the largest account balance over the last six years. For a $50,000 account, which have netted the client three figures of interest income per year (hardly Bourne territory) the penalty could near $15,000. The alternative could be even higher penalties and theoretical criminal prosecution.

Of course, in my example the U.S. treasury might not actually be out any money. Perhaps a couple of hundred dollars. Fifteen thousand for failing to report a few hundred. This is all you need to know about the U.S. view of foreign accounts -- be careful!

Posted by Henry Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210. The firm website is http://www.moravecslaw.com/