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Houston Estate Planning Law Blog

TEXAS CONGRESSMAN’S LEGISLATION TARGETING ESTATE TAX GAINS STEAM

The federal estate tax, often referred to colloquially as the “death tax,” takes a cut out of the assets left behind by individuals at the time of their death. Currently, only estates valued over a certain amount are subject to the death tax.

However, while the estate tax is primarily aimed at wealthy individuals, many argue that it does not accomplish its goals and that it has a disparate effect on farmers and small business owners. Through careful estate planning, high net worth individuals can often circumvent the death tax entirely, while those with most of their worth tied up in land or business equipment may take huge hits. When a farmer or operator of a small business dies, their heirs may have to sell off land or other critical assets just to pay estate taxes, potentially resulting in the ruination of a profitable enterprise.

One Texas Congressman, Kevin Brady, is seeking to eliminate the federal estate tax entirely in 2012. Congressman Brady’s bill, the Death Tax Permanency Repeal Act, has garnered bipartisan support from over 190 members of Congress, as well as advocacy groups like the National Cattlemen’s Beef Association.

If full repeal of the estate tax proves impossible, supporters are still looking to make the 2010 estate tax relief package permanent. Under that legislation, still currently in effect, estates worth less than $5 million for individuals or $10 million for couples are exempt from taxation; an estate’s net worth over the exemption limits is taxed at 35 percent (under the former default law, there was only a $1 million exemption, with the excess taxed at a 55 percent rate).

Only time will tell if 2012 will mark the death of the death tax. In the meantime, prudent estate planning will remain the best tool to ensure generational continuity in important family assets.

Source: Iowa Farmer Today, “Time for permanent relief from the federal ‘death tax,’” Kent Bacus, Feb. 10, 2012

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HOW ESTATE TAXES MAY HARM GANDOLFINI’S WILL INTENTIONS

When 51-year-old actor James Gandolfini died suddenly in Italy in June, a nation mourned. Best known for his role as the ruthless mobster on “The Sopranos,” in real life, he was quite the opposite.

But despite leaving a detailed will, second looks at how he divided his estate has some people here in Texas, as well as others across the nation, cringing. That’s because, as some experts have pointed out, Gandolfini’s will does not take advantage of current estate tax laws. In the end, the deceased actor may pay out more to the IRS than his beneficiaries–something he may not have intended when he first drafted the will.

Gandolfini’s major mistake was that he only left 20 percent of his estate to his wife. Federal law currently allows unlimited tax-free transfers to spouses; but because Gandolfini left a majority of his estate to his infant daughter and a son from a previous marriage, almost 80 percent of the assets covered by the will may be subject to both state and federal tax laws.  As our readers can imagine, this may not have been foreseen by the actor prior to his death.

While most of our Texas readers will want to make their wills as tax efficient as possible before they pass on, this may not have been Gandolfini’s thoughts. He may have wanted to ensure that his children were properly taken care of by their inheritance. But as we’ve mentioned to our readers on several occasions, this can be done through trusts as well, which will not only provide financial security for beneficiaries but avoid estate taxes as well.

Just this story alone is a great example of why speaking with an attorney is a good idea when preparing your end-of-life documents. While mistakes can be made by even the most well-informed of people, having the right help at your side can sometimes mitigate these mistakes so that they don’t get passed on to your beneficiaries in the end.

Source: CNBC News, “Gandolfini’s will a case study on what not to do,” Kelley Holland, July 26, 2013

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HOW THE DOMA DECISION WILL AFFECT ESTATE PLANNING IN TEXAS

During an end-of-March post, we brought to the attention of our readers the very real possibility that changes could be made to estate taxes barring the decision of the Supreme Court of two very important cases.  The most import of those was that of United States v. Windsor.  As many of our readers may remember, this court case asked whether the federal government had the right to define marriage and whether it could prohibit same-sex couples from receiving federal benefits.

Now, in what Time Magazine is hailing as “one of the fastest civil rights shifts in the nation’s history,” the Supreme Court has not only provided same-sex couples with more civil rights than were previously allowed, but may very well have changed tax and estate laws as we know them.

As many people here in Texas know, the court struck down the Clinton-era Defense of Marriage Act, which defined marriage (for the federal government) as a heterosexual union. Once DOMA was effectively abolished, the court then ruled in favor of Windsor, which ultimately changed estate planning for same-sex couples in regards to estate taxes. Even though our state does not recognize gay marriages, the federal government must now recognize the legitimacy of a homosexual marriage in the other states that do.

Aside from the lasting changes this will have on tax law, the impact this will have on estate planning will be far-reaching. It’s important to point out that while our state does not recognize gay marriage, federal estate taxes will still apply to same-sex couples provided their marriage occurred in a state that does recognize their union as being legal. What this means is that same-sex couples married in another state that have moved to Texas may file for the same “death tax” break that is awarded to heterosexual couples across the nation.

But while this will have an effect on federal tax laws, this may not an effect on other estate planning laws that are state specific. It’s because of this that same-sex couples are urged to speak with a qualified attorney to discuss how their assets will be affected down the road.

Source: Forbes, “Tax Implications Of The Supreme Court’s DOMA Decision: Same-Sex Couples To Be Subject To Marriage Penalty,” Tony Nitti, June 26, 2013

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LETTER FROM GEORGE WASHINGTON DONATED TO UNIVERSITY OF TEXAS

Donations are possibly one of the best ways to avoid pesky estate taxes when you pass away. But what if what your donation has no price tag or could be viewed as priceless in nature? Dallas’ very own oil and gas businessman Barron U. Kidd now knows the answer to that question after his surprising donation to the University of Texas at Austin this month.

So what was Kidd’s donation? A one-of-a-kind, handwritten letter by George Washington himself. There’s no telling what the letter could have fetched at auction nor will anyone ever know since Kidd handed the letter over to the university’s Dolph Briscoe Center for American History. It’s a priceless memento that is giving academics a rare look into the past.

As Briscoe Center Executive Director Don Carleton explains, the letter “sheds light on Washington’s views on Indian relations” from that time. In the letter, the future president writes about his outrage at the murder of three members of the Mingo tribe by white settlers, calling their actions “villainy” in nature. According to some scholars, this letter could change many of the perceptions people had about the first president and how he felt about hot-button topics of the day.

As for how Kidd came to possess the letter before his donation, sources do not say, but it’s likely that the businessman will continue his streak of being one of the university’s major donors. Some would reguard his move as an effective form of estate planning because it equally protects his assets for the future while preserving knowledge and history today.

Source: The Dallas Morning News, “Dallas businessman donates 1769 George Washington letter to UT-Austin,” The Associated Press, June 5, 2013

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HOW TAX LAW CHANGES COULD AFFECT YOUR ESTATE PLANS DOWN THE ROAD

With tax season well behind many residents in Texas, most people have long put out of their minds the financial information they needed to gather during tax preparation time. But while most people won’t think about their assets until next year, many estate planners suggest that now is the perfect time to start planning-and they’re not just talking about planning for tax season either.

Many estate planners are suggesting that people start considering how the new tax code will affect their financial plans for the future. Though a majority of people will not be affected by the largest tax law change, the increase of estate tax, subtle changes to the tax code could actually have a considerable impact on a majority of people down the road.

Looking over financial assets such as insurance policies and retirement funds now before they go back into a filing cabinet is a suggestion many planners are making to their clients. It might be advantageous to check contributions to retirement funds now versus closer to tax season. Because of the recession, people may have wanted to protect their money by taking smaller risks last year. With the market on the rebound, it may be time to change things around to maximize assets in the end.

During the hectic panic of the fiscal cliff, many wealthy people made decisions about their estates that they may regret next year. With the fear of rising estate taxes and reduction of exemptions for gift tax, many people rushed to turn portions of their estates into trusts. While still protected, forgetting about it could prove ominous if the tax code does not shift the way people were previously predicting.

Although the process might seem long and cumbersome to undertake at this time, failing to do so now could become regretful down the road. The question we pose to you then is why not take the time to protect your assets now while you still can?

Source: The New York Times, “Estate Planning Remains a Moving Target Under the New Tax Law,” Paul Sullivan, April 26, 2013

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WHAT COULD THE SUPREME COURT’S DECISION ON GAY RIGHTS MEAN FOR ESTATE TAXES?

It’s hard to turn on the nightly news or flip through the news feed on the internet in Texas without seeing the headlines regarding the recent cases before the Supreme Court regarding gay rights. But regardless of whether you’re for or against the idea, the issues before the Supreme Court this month could have some fairly substantial impacts, especially when it comes to estate planning and estate taxes.

One of the cases before the Supreme Court specifically focuses on estate tax and its effects on homosexual couples. In the case, Edith Windsor explains that when her partner died, she inherited her spouse’s estate, which was estimated to be about $4.1 million. But instead of enjoying the exemption from the same federal estate taxes that heterosexual married couples receive, she was taxed for the estate to the sum of $363,000.

Despite Windsor’s marriage to her spouse, because of the Defense of Marriage Act, the federal government does not recognize the union and therefore does not offer her, and other homosexual couples like them, the same tax breaks that heterosexual couples receive. Windsor’s challenge of DOMA has now reached the Supreme Court where the justices will decide one two major issues. One of which is whether DOMA is unconstitutional, and two is whether future homosexual couples will be able to receive the same benefits surrounding estate planning.

Though not expected until June, the ruling could have a significant impact on not only estate taxes but estate planning as well. With the ability to leave assets to loved ones, the justices’ decision could change how homosexual couples write their wills and distribute their estates in the future. It’s a change that can mean a lot, both good and bad.

Source: Thomson Reuters, “Analysis: Death, taxes and the Supreme Court’s gay marriage case,” Kim Dixon, March 12, 2013

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HOW IS TURMOIL IN DC AFFECTING THE ESTATE TAX IN TEXAS?

Since the recession, and probably sometime before it became more than just a few-year-slump, Texas legislators have been considering the very real possibility that the federal government may not be able to give them the necessary funds in order to balance their hefty budget.

So far, funds provided by the federal government account for more than a third of the state’s budget; but what if that money dried up? How would Texas legislators be able to subsidize an approximated $64.7 billion loss?

According to a bill introduced this month by Rep. James White, R-Hillister, the answer may be to bring back the state’s estate tax. Although calculations suggest that by re-instating the tax, the state would collect between $62 million and $317 million over the course of 2013, an increase in estate taxes could mean a significant decrease in the amount of money some people intend for their beneficiaries.

Though many Texans agree that weaning themselves off of federal funding could save them a large headache if there is another financial crisis from Washington D.C. in the future, they also point out that in the majority of cases that would be affected by the tax hike, the estates being given to beneficiaries would be going to people may be suffering financially. The additional money that would be spared because of an absent estate tax could mean a bigger difference than it would to the state government.

Although other state legislators are praising Rep. James White, R-Hillister for his efforts to protect Texas financially in the event of Federal financial turmoil, some people in the community urge representatives to reconsider the impact this will have on people and their beneficiaries.

Source: The Dallas Morning News, “Rep. James White files ‘Texas Self-Sufficiency’ bill to analyze reliance on federal funds,” Claire Cardona, Jan. 22, 2013

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HOW DID THE FISCAL CLIFF AFFECT OUR TAXES FOR 2013?

When talks of the fiscal cliff began, a majority of people across Texas, including just about everyone else in the United States, worried about how the expiration of the Bush-administration tax cuts would affect their earnings in 2013.

For months, Congress has been in a headlock over how best to approach the new budget and with neither side budging, even hours before the ball drop, the world looked on with anticipation to see how it would all turn out.

But in the wee hours of the morning on Jan. 1, Congress and the president came to a tentative decision that could have considerable impacts on how much money a majority of people will see paid out in the upcoming year. This is especially true for those people who may have waited until after the fiscal cliff to do any sort of estate planning.

According to the federal government, taxpayers will continue to pay the current tax rates. However, it’s good to point out that although tax rates will be staying the same, take-home pay will likely be less than anticipated because of the expiration of the 2 percent reduction in Social Security tax.

With a series of other tax rates increasing by about 5 percent across the board, many Americans fear there may not be a silver lining when it comes to the amount of money they will be able to leave their beneficiaries after they pass. The good news may be that the estate tax exemption will continue to remain at $5 million-adjusted for 2013 inflation, of course, to just over $5 million. Even though the estate tax rate will be increased from 35 percent to 40 percent, this will only take affect after a person’s estate has surpassed the $5 million exemption. Though it may appear to be a small silver lining, this may actually be good news for people who expected much worse.

Source: Forbes, “Secrets Of The Fiscal Cliff Deal,” Tony Nitti, Jan. 2, 2013

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THE FISCAL CLIFF AND ITS IMPACT ON ESTATE PLANNING FOR 2013

For a little over a month now, the nation has been watching in trepidation as the fiscal cliff looms ever closer, but for some people here in Texas, and perhaps other states, they could be wondering what the concern is really all about.

During George W. Bush’s presidency, we watched as estate tax rates dropped to a mere 35 percent as the amount of money allowed for gift tax exemptions rose to a staggering $5.12 million. But come January 1 that could all change if Congress can’t come to a consensus over what the new limits will be in 2013.

If Congress doesn’t reach a decision, gift tax exemptions will roll back to $1 million while the estate tax rate will rise to 55 percent. And although this has relatively no affect on the average American, those who have accumulated large enough estates are becoming increasingly worried that their estate planning measures may need to be considerably altered so as to shelter their estates from future changes.

Many financial experts point out that it’s not too late to change your estate plans; in fact, if you are among the few whose estate exceeds $1 million, you are highly encouraged to do so before the start of the New Year. By restructuring your estates into trusts, insurance and other techniques, you may be able to prevent your beneficiaries from seeing a considerable loss in their inheritance when it comes time to collect. Some have even suggested that giving assets as gifts now instead of at the time of your death could greatly reduce the amount of gift tax that is paid out this year, which could provide more asset protection in the long run.

Some critics have argued that there is the likelihood that Congress will not allow the fiscal cliff to occur, pointing out that if any of them were even remotely successful in their business careers then they would find themselves in the $1 million to $5.12 million range. But even if these critics are wrong, it’s always better to plan for the worst and hope for the best in situations such as this.

Source: The Bradenton Herald, “Fiscal cliff causes estate planning conundrum,” Tom Breiter, Dec. 11, 2012

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CHANGE IN EXEMPTION RATE COULD MEAN LESS MONEY FOR HEIRS

Starting January 1 the federal tax exemption on estates and gifts is set to roll back from $5.21 million to $1 million which could present a problem for heirs if people don’t take advantage of the exemption now rather than at the time of their death.

Many people have argued that estate attorneys and other financial professionals have sounded the alarm before when estate and gift taxes were up for review, but experts are saying this time the alarm should be duly noted. Experts warn that in today’s political and economic climate Congress is less likely to keep the exemption rate as high as it is for very much longer.

One reason some experts are suggesting that people claim their estates now is that if an individual waits too long to begin the process, there is a good chance that they won’t be able to complete the paperwork before the year’s end. In some circumstances, not filing paperwork before the deadline may increase the amount of tax that they pay on their estate thus reducing the amount they give to their heirs.

Because estate planning involves a number of interlocking parts that all require some degree of time and attention, timing is crucial in most cases. Giving sizable gifts under the current limits in order to reduce estate size may avoid a potential tax hit at a person’s time of death. Estate planning attorneys point out that this will only be possible if people give ample time for the planning process, pointing out that it is difficult to finish the process in any time less than a month.

A managing director of one of the nation’s largest accounting firms summed it up by saying, “My guess is that these are the best rules you’re going to get in your lifetime.”

Source: The Wall Street Journal, “No playing chicken with estate tax deadline,” Charles Passy, Oct. 2, 2012

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