New Jersey Estate Planning & Elder Law Blog : New Jersey Estate Planning Lawyer & Attorney : Deirdre Wheatley-Liss : Fein Such Kahn & Shepard Law Firm : Elder Law, Tax Planning

Are you an early filer?  You know the one.  You get all your tax papers by February 3, you file on-line by February 4, and get your refund deposited by February 11?  Well, if you itemize, that quick time-line won't be happening this year.  Steven A. Loeb, Esq. of our Tax, Trust & Estates, and Elder Law Department brought to my attention that due to the tax compromise legislation, the IRS needs to reprogram its computers.  USA Today reports:

The delay is necessary because the IRS needs time to program its systems to accommodate tax breaks included in a compromise tax bill President Obama signed last week.

The delay means millions of taxpayers will have to wait longer to get their refunds next year. Taxpayers who will have to wait until mid- to late February to file include:

• Taxpayers who claim itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses, state and local taxes.

• Taxpayers who claim a deduction for tuition and fees. This is a so-called "above-the-line" deduction, which means taxpayers don't have to itemize to claim it.

Parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit, will not have to wait to file, the IRS said, assuming they don't itemize.

• Taxpayers who claim the educator expense deduction. This deduction, which is also an above-the-line deduction, allows teachers to deduct up to $250 in out-of-pocket costs for classroom materials.

So for all of us who pay a mortgage, plus others who itemize, we will have to wait to file, which means those refunds will be coming a little later this year.

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You Will usually says "I leave my estate to my children" or maybe "to my grandchildren" or "to my children, and if a child isn't living, then to their children".  You will notice that no names are being used.  Guest blogger Stacey C. Maiden, Esq., Of Counsel to our Tax, Trust, Estates and Elder Law Practice Area,  today looks at the question of what happens when new children or grandchildren are born after the Will is executed.

A common question from our estate planning clients, who name children, grandchildren or great-grandchildren in their Wills, is “what happens if another child, grandchild or great-grandchild is born or adopted? Do I need to update my Will?” New Jersey has a statute which addresses the issue of the after-born or after-adopted child (N.J.S.A. 3B:5-16) and we can draft language to specifically include any after-born or after-adopted children, grandchildren or great-grandchildren in the Will. But what if the Will does not contain this sort of language and the beneficiaries are great-grandchildren?

The New Jersey Appellate Court recently considered these facts in the unpublished case, In the Matter of the Estate of Francis Marie Ackerson Yetter, Deceased, (A-0971-09, decided December 22, 2010). In her Will, Mrs. Yetter left certain shares of stock to two named great-grandchildren, who were her only great-grandchildren at the time. After Mrs. Yetter signed her Will, two more great-grandchildren joined the family. The after-born great-grandchildren argued that the devise should be treated as a class gift, entitling them to share equally with the great-grandchildren identified in the Will.

The Court considered the circumstances and overall testamentary scheme, and agreed, finding that Mrs. Yetter did not intend to omit her after-born great-grandchildren. The Court applied the doctrine of probable intent, which allows the Court, as far as possible, to ascribe to the testator “those impulses which are common to human nature,” finding that excluding two of her great-grandchildren from her Will would be against the “common human impulses” of a great-grandmother who otherwise always treated her family fairly and equally.

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I wouldn’t have taken bets on it, but Washington has hammered out how our federal tax laws are going to look for the next 2 years. On the plus side, we know what taxes are going to look like in January 2011, which is a far better place to be than Monday of last week. On the downside, this does not represent thoughtful tax reform – instead, it is knee-jerk politicking with the intent to dump the tax issues in the voters' laps at the next election so no politician is "responsible" for having taxes go up.

The cost of this package? $858,000,000,000.00 added to the federal deficit- yeah, that's a big number. Oh, and "added to the federal deficit” really just means that we spent $858,000,000,000.00 that we don't have. What I'd like to see happen in the new year – an actual bi-partisan examination of how tax policy affects the economy, and a roadmap to create a balance between the amount that we are spending, and the amount of revenue being generated.

To get back to the new law, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRA") extends many tax cuts that were going to expire on December 31, 2010, as well as throws in some new tax laws. Some highlights:

• The maximum federal income tax rate will remain at 35%. New Jersey income taxes are an additional maximum 8.97%
• Married couples will continue to benefit from the 200% standard deduction
• High income taxpayers will not be subject to phase-out of itemized deductions and personal exemptions for high-income taxpayers
• Most key - "Patch" of alternative minimum tax exemption to keep rate with inflation (this is a law they should really make permanent)
• Capital gains and dividends will continue to be taxed at 15%. New Jersey income taxes are an additional maximum 8.97%
• The federal estate tax returns with a portable exemption of $5 million per person and a maximum tax rate of 35% (more to follow). New Jersey’s exemption rate continues to be $675,000 per person and is not portable.
• The greatest opportunity is created in the increase of the gift tax exemption and generation skipping tax exemption to $5 million per person at a 35% maximum rate. New Jersey does not have a gift tax.
• Extension of unemployment benefits for 13 months
• Employees will benefit from a 2% reduction in Social Security withholding
• Business owners can depreciate 100% of new business assets placed in service before January 1, 2012

My thanks to Sobel & Co for their excellent TRA summary, which I used as a resource.

 

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 I author this blog, quite simply, because I'm really passionate about what it is that I do.

I enjoy helping people find ways to pay their legally minimum required taxes. I think that the government's partnership in everything you earn shouldn't be a secret – everybody should know how tax law will affect their decisions.

I think that it's a shame that people who worked their entire lives, served in our military, and built the country that we know today are fearful of how they will be cared for or be able to stay in their own homes as they get older.  I feel good about showing families that there are steps that they can take today to be in a position of empowerment tomorrow.

I find other people's businesses fascinating – what's their growth strategy, what's their secret to success, what are their fears? I love working with business owners to find ways, through the legal arrangements that they enter into, to support those successes and minimize those fears.

I blog about these things because this platform is my soapbox, where I get to stand up and grab my virtual loudspeaker. So many of my clients have the same concerns, the same questions, are seeking the same information. This blog gives me an opportunity to educate a whole world of people that I haven't yet met about why they should be concerned about how the law impacts their daily lives, to answer questions that are commonly asked, and to give people information so that they have the ability take action in their own lives.

What was the inspiration for this soliloquy? I was recently interviewed by Lexblog (the company that hosts and supports this site) and it got me thinking about why this blog has been part of my life for the past five years. You can enjoy the interview here, or even listen to the podcast (a first for me).

Right now, all the ideas on the topics covered on this blog come from my head, out of conversations with my associates and partners, out of client meetings, or through what I'm reading in the news as I keep up with the ever-changing terrain of law. What I'd love to know is what kind of questions do you have that you'd like to see me addressing on my virtual soapbox?

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The new estate tax legislation proposed by Sen. Reid (D. NV) contains some pleasant surprises for wealthier Individuals.

First, as expected, it proposes to raise the estate tax exemption amount to $5 million per person with a maximum 35% estate tax rate for the next 2 years.

Additionally, the proposed legislation is retroactive to January 1, 2010, so that the estates of people who died in 2010 can select the new 2011 law, or the basis allocation law that has been in place during this year.

Most unexpected,the new law also proposes a 2 -year window where there is a $5 million gift tax exemption per person, with a gift tax rate of 35%. There would similarly be a $5 million Generation Skipping Tax exemption.This could give individuals a huge planning opportunity to transfer assets with great growth or income potential to the next-generation at little or no transfer tax cost.

And now we wait to see what happens next…

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Well, we now know one thing about taxes for 2011 - the rates you can use to deduct for mileage and what your employer may reimburse you for mileage starting January 1:

• 51 cents per mile for business miles driven
• 19 cents per mile for medical or moving miles driven
• 14 cents per mile for miles driven in service of charitable organizations

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While there is no estate tax in 2010, there is still a tax form to be filed with the federal government in relation to the estates of people who died in 2010.  As discussed in greater detail here, where a person has died in 2010 their executor has an opportunity to allocate $1.3 million to the basis of their assets (plus an additional $3 million for assets passing to a surviving spouse).  The great question is "How?".

We tax attorneys are good at following the often complicated rules the IRS lays out, but here there is a total absence of direction.  The IRS has promised to issue a new Form 8939 to allocate basis as set forth in 1022 of the Code.  However, this is what the website for that form currently says:

Form 8939 in Development
Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, is in
development and will be posted here shortly. Disregard all prior drafts.  

Not exactly helpful.  

So what is an Executor or Personal Representative to do to meet their tax filing obligations where a person died in 2010?  Our office is preparing a spreadsheet with all the information required under Section 1022 and having it attached to the decedent's final 1040 being filed April 15, 2011.

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The Wall Street Journal reports that the Senate is sending out legislation to allow estates of people who died in 2010 to choose EITHER the 2010 1022 basis election OR the 2011 estate tax laws, which are currently proposed to be a $5 million exemption per person and 35% estate tax.

Legislation taking shape in the U.S. Senate to extend expiring tax cuts would give heirs of wealthy people who died this year a choice of which estate-tax policy to apply, according to an aide close to the discussions.

Estate executors could choose to apply the rules in place this year, in which there is no federal estate tax, or the rules that would take effect next year imposing a 35% tax rate on estate wealth over $5 million.

The ability to elect either 2010 or 2011 rules would help certain heirs of those who died this year. Even though there is no estate tax, some assets inherited in 2010 face capital gains or other taxes because of a change in the way the value of those assets is calculated.

This would be a whole new issue for estates of people who died in 2010, creating both opportunities to save tax, and potential pitfalls if timely elections and filings are made (and of course, no word on what would be timely).

Image: Idea go / FreeDigitalPhotos.net

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The Obama Administration and Republicans have apparently reached a deal on the estate tax reports Derek Jensen:

President Obama and Republicans have apparently come to terms on extending the Bush era tax cuts and believe it or not that deal includes the estate tax. The Federal Estate Tax would still return next year, but instead of coming back with a top rate of 55% and an exemption of $1 million, it would return with a top rate of 35% and an exemption of $5 million - for the next two years. See: Obama Announces Estate Tax Deal With Republicans: 35% Tax Rate And $5 Million Exemption, For Two Years - Hani Sarji - Estate of Confusion – Forbes

In this great post, Derek goes on to point out some key problems with this proposal:

• It needs 60 votes in the Senate
• The House has never passed estate tax reform legislation with these amounts
• Its still a 2 year only deal - how do we advise clients?

Once again, it seems a case of "just get it done" tax law as opposed to considered tax policy.  We elect officials to consider and make law - its a shame when the answer is to just put it off and make it somebody else's problem.

Image: jscreationzs / FreeDigitalPhotos.net

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So Dem and GOP appear to all agree to extend this years income tax rates to next year - avoiding a jump in income and capital gains taxes when the ball falls on New Years Eve.  This has been greeted with great fanfare in the press and an apparent sigh of relief and an attitude of  "well, that's done now, on with Holiday shopping!". Whoa there - wait a minute - y'all ain't done yet.

Yes - the income tax effects everyone who earns or invests money, so agreement on that is the biggie.  But there are lots of other tax issues that need to be addressed before year end.

The AMT (Alternative Minimum Tax) is a second way to calculate taxes.  If you fall into the AMT, you pay the higher of the normal tax calculation or the AMT.  The AMT was designed to more effectively tax income of very high earners back in the days of tax shelters,etc. The problem is that the level at which a person "qualifies" for the AMT is not indexed for inflation - so each year more and more families fall into the AMT not because they necessarily earned more, but because their earnings increased by a natural costs of living amount and the AMT did not.  The result?  Each year in December Congress traditionally passes an AMT "patch" which effectively adjusts the AMT limit for inflation (why they don't just pass the law one time to index for inflation automatically each year I don't know - maybe so lawmakers can create press being seen as Robin Hood each year "we staved off the AMT for another year - Merry Christmas").

Even the IRS has implored Congress to patch the AMT.  According to Reuters "The U.S. tax chief told lawmakers on Wednesday the Internal Revenue Service needs clarity on the fate of the alternative minimum tax, which could ensnare 21 million unintended taxpayers if a law is not amended before year-end."  In fact, the IRS computers are already programmed as if the AMT was patched - if its not, they need to reprogram all their computers, which could delay refund processing as people being to file their 2010 income tax returns.

The Estate Tax is coming back to life next year too - anyone want to talk about that? Just like the income taxes were scheduled to rise, the estate tax is scheduled to come back at a $1million exemption per person next year.  Congress keeps talking about increasing the exemption to $3.5 million, but nothing concrete so far.  People want to be able to plan their estates, and this complete uncertainty of what to do next is paralyzing.

Image: renjith krishnan / FreeDigitalPhotos.net

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I was recently interviewed about the question of what conversations should couples entering into second marriages have?  In a second marriage, not only are you bringing more experience to the table, but also a potentially more complicated financial picture.  You could have financial obligations to a former spouse or your children.  Due to a prior divorce you may be more sensitive about protecting your assets in the event the marriage doesn't work out. You could have a strong financial picture and your new spouse could have debts.

In Financial Candor Makes Second Marriages Sweeter writer Judy Dahl combines my interview with other experts to produce a guide to the having an open financial conversation with you spouse to be.  While not the stuff of romance, considering these points can help develop a strong foundation for the new partnership.

• What assets does each spouse have?  Who would be entitled to those assets in the event of divorce or death of a spouse?
• What income does each spouse have or will have in the future?  How will each spouse's income contribute to household finances?
• What debts does each spouse have? Who is going to pay them?
• What does your day to day spending look like?  What are your long term financial goals?
• Is a prenuptial agreement for you?

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