Articles & Blog

“Lame duck session” or “dead duck session”

Congress needs to finalize a budget by December 3th, and vote on an extension of the Bush tax cuts soon so the citizens will know what the playing field is by 2011. They are still arguing whether the extension should apply only for those making less than $250,000. Although not a priority on their list but it would be helpful if Congress could decide on whether to adjust the estate tax otherwise it will arrive like a bear in 2011 with one million-dollar exemption and a 55% tax rate.

This is to mention a few items on their desk. You would think that they would have received the message a few weeks ago as the people spoke at the ballot box. Yet nothing but politics as usual occurred during the first week of the lame-duck session.

The people want good decisions made rather than politics as usual. Nothing will occur until maybe after Thanksgiving as the leaders of Congress meet the President on November 30.

We will keep following what happens; and hopefully it will be a path to progress.

NJ Transfer Approved for Purpose Other Than to Qualify for Medicaid

A New Jersey administrative law judge finds that a Medicaid applicant who was healthy at the time he transferred funds to his daughter transferred the funds for a reason other than to qualify for Medicaid. R.C. v. Division or Medical Assistance and Health Services and Hudson County Board of Social Services (N.J. Office of Administrative Law, Hudson County, OAL DKT. NO. HMA 08047-10, Oct. 22, 2010). While R.C. was healthy he transferred $100,000 to his daughter to help with her financial problems. A year later, R.C. suffered a stroke and his health began to deteriorate. He was eventually admitted to a nursing home. R.C. applied for Medicaid benefits. The state denied benefits, finding that R.C. had made an uncompensated transfer of assets to his daughter. R.C. requested a hearing. The administrative law judge (ALJ) reverses, finding that the transfer was made exclusively for a purpose other than establishing Medicaid eligibility. The ALJ concludes that because R.C. was employed and in good health when the transfer occurred and the stroke was unexpected, R.C. provided convincing evidence that he did not transfer the money in order to qualify for Medicaid.

Estate tax; lame-duck session

Congress begins the lame-duck session today for two weeks. Will they tackle the estate tax issue ?

To begin with there is infighting in both Republican and Democratic parties with respect to leadership roles. Then there’s the overall discussion of dealing with the deficit which of course will not be resolved during these two weeks.

What needs be tackled is the budget which if not worked out the federal government will not have authority to spend money starting December 3rd. Some people might like that even though not practical. And the other important item is income tax rates which if not resolved will increase substantially starting January 1.

Will be estate tax issue be discussed and resolved with the above items that need be determined in only two weeks. Doesn’t seem likely but we will watch.

Estate tax

After yesterday’s election results we may finally see some changes with estate taxes. If Obama agrees to change course, as a result of the strong statement made yesterday by the people, we may see the Bush tax cuts extended for everyone and, along with that, the estate tax rate and exemption may be the same as in 2009 (or something very close to that rate and exemption). The House may introduce such a bill and it may be very difficult for the Senate and the Administration to reject such a bill after yesterday’s elections. These issues will be discussed over the next two months and hopefully finalized early in January, or shortly thereafter, and made retroactive to January 1, 2011.

“Estate Tax” ; the states fair better without any estate tax changes.

If Congress does nothing to change the estate tax, on January 1, 2011, the federal estate tax law reverts to the 2001 law as it existed prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). As a result, the states will obtain the money they once received prior to EGTRRA. This is because EGTRRA repealed the state death tax credit which was fully phased out after 2004. This state death tax credit received by the states began in 1924 and survived with some adjustments until 2004. This credit was free money for the states and had no adverse effect on the residents of the states. Surprisingly, at the time of enacting EGTRRA there was no strong advocacy by the states and the credit was eliminated under EGTRRA.

In 2001, prior to EGTRRA, the state death tax credit was calculated as follows: an amount of $60,000 was subtracted from the taxable estate to obtain the adjusted taxable estate and with that figure the state death tax credit was calculated from a table as provided by the IRS. Generally an amount equal to the state death tax credit was distributed to the applicable state. Under EGTRRA the federal government reduced the estate tax rate but they receive more tax monies because of the elimination of the state death tax credit.

If Congress does nothing then on January 1, 2011, the states will receive this credit money again as the state death tax credit will be restored.


Estate Tax-Congress Adjourns

Congress adjourned yesterday and there will be no vote on adjustments to the estate tax nor extending the Bush income tax cuts until after the elections. This is no surprise. Here we are again wondering when Congress will give some guidance as to planning for income taxes and to individuals who would like to plan their estate. House Minority Leader John Boehner voiced his opinion that “a vote to adjourn is a vote to raise taxes”.

Currently we have no choice but to plan an estate assuming that the current law will stay intact and beginning January 1, 2011, we will have a $1 million exemption per person and 55% estate tax rate.

“Estate Tax”

And the discussion continues. Many thought that adjustments to the estate tax law would have been made during the past nine months; but as we know nothing has happened. Another billionaire died in the meantime, John Kluge, and no estate tax has been incurred.

Very recently Senator McConnell and Senator Grassley introduced the Tax Hike Prevention Act which would provide a 35% estate tax rate and an exemption of $5 million per person and back to a step up in basis for assets inherited. There are some who propose to go further and eliminate the estate tax such as Republican Senate candidate Pat Toomey of Pennsylvania. He is pushing for the elimination of the tax as he complains that according to a recent study 1 million jobs have been lost in the United States because of this tax.

Let’s see where this new proposal (The Tax Hike Prevention Act) takes us. Maybe something will happen in November or December after the elections.

“Estate tax” – discounts

Discounts have always been a topic with estate and gift tax planning and below are a few recent examples of cases involving discounts:

In the Holman recent holding of the Eighth Circuit (No. 08-3774; Eighth Circuit, April 7, 2010), the Court found that the restrictions as contained in the limited partnership agreement should be disregarded. The Court found that the provisions of the Internal Revenue Code Section 2703 applied and refused to allow a discount for restrictions that a partner could only transfer interest to other family members or to trusts of family members. The statute only allows such restrictions if it is a bona fide business arrangement, and the Court found that it was not a bona fide business arrangement. The Court cited cases where similar restrictions were allowed because they were shown to be legitimate business purposes. As a result, the Court eliminated the discounts sought by the taxpayer applicable to those restrictions.

In a Tax Court Memo, Pierre vs. Commissioner (TC Memo 2010-106, May 13, 2010), the Court disallowed discounts where a single member LLC was formed and some shares were gifted to an irrevocable trust, and some shares were sold to the irrevocable trust on the same day. The Court found that the step transaction doctrine applied. The accounting ledger showed that only gifts occurred, and was inaccurate as it did not show that part was gift and part was loan. These transactions (gift and sale) should not have occurred on the same day but should have been separated.

Discounts were reduced in another Tax Court case, Ludwick vs Commissioner (TC Memo 2010-104, May 10, 2010), regarding partition, and the Court only allowed discounts for cost of the partition, including maintenance of the property for the time incurred during partition.

Discounts may also be a topic when Congress eventually tackles estate tax legislation. The Obama Administration has already raised issues of discount and valuation during the campaign and even more recently. Discounts have a dramatic effect on the amount of estate taxes being paid and, although this issue is not discussed a great deal by the proponents and objectors of the estate tax, this topic needs to be watched closely.

“Estate tax”

“Estate tax” among other tax issues

As previously mentioned if Congress does nothing both the estate tax and generation skipping tax return like a bear in January 1, 2011 with a $1 million exemption per person and a 55% bracket. However, along with the death tax, there are other serious income tax changes that will occur if Congress does nothing; capital gain rates will increase from 15% to 20%; highest rates on ordinary income will rise to 39.6%; and certain dividends will be taxed at the higher ordinary income tax rates rather than 15%. Also certain trusts would incur a 3.8% Medicare surtax.

In light of Congress’ recent history we are very unsure that any tax change will occur prior to January even if you believe it’s for the good of the ailing economy. Thus, everyone should assume that change will not occur and make appropriate plans.

We cannot control when we die so we cannot control if the estate tax will be applicable (there is no estate tax or generation skipping tax in 2010). However, we can plan on selling certain assets to insure the current capital gain rates, and possibly move assets to more tax efficient mutual funds; also gifts of dividend paying stocks to lower bracket family members may be an option either by outright gifts or by sale to defective grantor irrevocable trust. Also a review should be made of tax-deferred annuities as an option as tax rates get higher (and don’t forget the higher tax rates beginning 2013 for certain individuals under the new Health Care Act).

Many decisions to be made.

“Estate Tax”

As we know this past December the House of Representatives passed a bill to continue the estate tax law as in 2009 with a $3.5 million exemption; however, because of the healthcare discussions the Senate never reviewed that House bill. As we discussed in our blog throughout this year many Senators and Congressmen have proposed legislation for both higher exemptions and lesser rates and lower exemptions and higher rates. Congress has failed to act on any of these proposals.

Most recently, last week, Senators Kyle and Blanche tried to add their proposal of a $3.5 million estate tax exemption and a 35% tax bracket, adjusted for inflation, to the small business bill and it was rejected by the Democratic leaders.

At this point some believe there will be legislation in November and December but most believe that we better get ready on January 1 for a $1 million exemption and a 55% bracket. This will hurt many pocketbooks and affect a great deal of the estate plans.