Portability and the Federal Estate Tax: You can take it with you!

Nothing is certain in the world but death and taxes.  The estate tax is the government’s way of celebrating both events at once.  When you die, the state and federal governments impose a tax on the net value of your estate.  That general rule is subject to many exceptions.  Right now the two largest exceptions to the federal estate tax are that:

1.  The transfer of property from the first spouse to die to the second is exempt from estate tax.  The term of art is the “unlimited marital deduction”.  When husband dies, leaving everything to wife, the entire amount of the property escapes the estate tax at the husband’s death.  The theory is that the property ends up in the wife’s estate, and so is taxed once, upon her death.  Otherwise, the same property would be taxed twice – at the time of each death.  That is basic fairness. 

2.  The first $5 million of each estate is currently exempt from federal estate tax (and the term of art is the “applicable exclusion amount”).  If you die with a net estate of $5 million or less, you pay no federal estate taxes.  Above $5 million, you pay tax at a rate that tops out at 35%.  This is the state of the law until the end of 2012, when the issue is then turned back into an election year football.

For now, if husband and wife each had $5 million in assets in their own names, then when husband dies, he could leave his $5 million estate to all of his beneficiaries (other than his wife), without paying any federal estate tax.  When wife dies, her $5 million estate could go to her beneficiaries, again tax free.  So, $10 million of family assets would pass tax free to the next generation.  But, if you change the facts ever so slightly there, and had the husband leave his $5 million to his wife, who died the following month owning $10 million in assets, then the first $5 million would be tax free, and the second $5 million would be taxed at 35%.  The estate tax would be $1,750,000.  The term of art for that result is “expensive mistake”. 

This does not seem quite fair that the same wealth and the same basic circumstances could be taxed so differently.  Clever lawyers developed a way around that unfair result – the credit shelter trust – which gave the wife the income from the husband’s money for life – and then when she died, each estate received the maximum estate tax exclusion.  If your current will is written with a credit shelter trust in place, which provides that the husband’s estate goes, not directly to the wife (and vice versa), but into trust for the benefit of the wife, and then upon her death to his heirs, then that is the reason.  Tax gymnastics.  Or as we attorneys prefer to call it, estate planning. 

Under the most recent amendments to the federal estate tax though, a new concept has been introduced in this area:  portability.  Rather than forcing the husband’s estate into a trust for the surviving wife, the law now recognizes that like situations should be treated that way.  When husband dies, leaving his assets to his wife (or even in the situation where all assets are jointly titled in both names and automatically pass to the wife), his estate does not need or use his $5 million exclusion.  Everything passes tax free to a spouse under the unlimited marital deduction.  In the past, the husband’s exclusion amount would have been lost.  But amazingly, once was lost now is found, through portability.  The surviving wife’s estate now gets to use the husband’s $5 million exclusion amount, plus her own exclusion amount, when she dies.  As a result, $10 million in family assets escape the federal estate tax.  Order reigns in the universe.  Until 2013.

There is still value to the credit shelter trust arrangements.  First, we don’t know what will happen in 2013, but in default of Congressional action, the rules of 2001 will be restored, and so the trust device will then be beneficial.  Second, assets that are placed in trust are placed outside the reach of creditor’s claims of the wife.  Third, the growth in value of appreciating assets such as stocks held by the trust, will not be subject to the estate tax – because they are not in the wife’s estate.  So, there is no need to jettison your will because it has a credit shelter trust in it.

The estate tax has been constantly in flux over the last several years.  The great majority of Americans are unaffected because their estates do not exceed $5 million.  But, if you are over that amount, in a situation where a simple lack of a plan can cost you over a million dollars in taxes, you should seek out competent tax planning advice.  Check your will, understand what your estate plan is and the results it seeks to obtain, and see your friendly neighborhood attorney if you have questions!

©2011  Douglas P. Humes

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice in an old mansion in Bryn Mawr, Pennsylvania.  Contact him at Tel: 610-525-7150, or via email athumeslaw@verizon.net.

Filing for an extension on federal, state and local income taxes (Updated 2017)

If you have not filed your federal or state income tax returns or paid your taxes, you can file an extension on or before Tuesday, April 18, 2017.  The standard extension is 6 months - so you then have until October 15th to get your final return filed.  You still must pay what you estimate you owe in taxes.  Your filing for a federal extension automatically qualifies you for an extension for your Pennsylvania income taxes as well.  As to local income taxes - your mileage may vary - call the local tax assessor and ask the question about what you need to do to apply for an extension with them as well.  

Here is the lowdown from the IRS on the federal extension:

Requesting an extension (Federal)

---

Taxpayers who cannot complete their return and file by April 18, 2017 may request an extension of time to file.  There are several ways to file Form 4868 for an extension.

File electronically:

• IRS Free File or Free File Fillable Forms 
• Paid preparers
• Commercial tax software

Or, download a paper version of Form 4868  and file by mail. 

Reminder, an extension of time to file is not an extension of time to pay. 

And here is the parallel information for Pennsylvania:

How do I get an extension to file my PA Income Tax Return?

If you need more time to prepare your taxes than the deadline permits, you may file for an extension of time by completing an "Application for Extension of Time to File" REV-276.

Here is the link to the form:

http://www.revenue.state.pa.us/portal/server.pt/document/628984/rev-276_pdf

If you have an approved extension from the Internal Revenue Service (IRS), you do not have to file for a state extension unless you want an extension greater than the extension granted by the IRS.

However, please remember that an extension to file is not an extension to pay. If you feel you will owe tax, you should send a payment for the amount of tax you expect to owe. Make sure you record your Social Security Number on the check with the notation that you are making an "extension payment" for the tax year.

Mail your extension payment and/or application REV-276 by April 18, 2017 to:

PA Department of Revenue
Bureau of Individual Taxes
PO Box 280504
Harrisburg, PA 17128-0504

After filing for the necessary extensions, diary ahead for that October deadline so that you remember that you have not filed your return.  Give yourself plenty of advance notice.  Now that the pressure is off, don't put yourself back in that position in October!

Tax Day coming up: extensions to file and pay

Tax Day - the date your federal income taxes are due, is the latest it can be this year:  Monday, April 18th.  Normally it falls on April 15th.  When the 15th is a weekend day, then the deadline is pushed off to the next business day - the following Monday.  This year the 15th is on a Friday - and so normally that would be the deadline.  However, the city of Washington DC has a legal holiday called Emancipation Day - which commemorates the anniversary of the the signing by Abe Lincoln of the Compensated Emancipation Act on April 16, 1862.  That Act eliminated slavery in Washington DC, and provided compensation for slave owners.  


Typically the holiday is "observed" on April 16th.  However, when the holiday falls on a weekend, it is "observed" on either the previous Friday or the following Monday.  Presumably, it is "observed" on a week day so that the legal holiday falls on that week day and permits the local government offices to take the paid holiday that accompanies it.  And this year, our of respect for that DC holiday, Tax Day, which would otherwise fall on the date on which Emancipation Day is observed in Washington DC this year, is instead pushed back to the following Monday, April 18th.  


If you are a card carrying member of the Procrastinator's Club, then you already know that you can routinely file for an extension to the deadline to file your return - and that will postpone the filing obligation till October 17, 2011. However, the extension does not waive the obligation to pay a pretty accurate estimate of what you may owe in taxes by the April deadline.  In other words, you need to rough out what you may owe, and pay that amount with your extension request.  You can firm up that figure when you file your final return on or before the October deadline.  For more information on seeking an extension, go to IRS Form 4868: Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.  This is the very simple one page form with instructions.

What if you need more time to pay your taxes?  You can ask as well for an extension of the time to pay, or you can enter into an installment payment plan.  You may be charged interest and penalties, but the IRS offers options that can avoid or minimize those charges as well.  If you don't use the IRS's methods, and don't file your return or pay your taxes on time, then you will be charged various penalties and interest.  So it is definitely worthwhile to look into what programs the IRS offers.  Here is there current IRS Tax Tip, with helpful links, on taking more time this year to pay your taxes:

"Here are the top 10 things the IRS wants you to know if you need more time to pay your taxes.

1. Taxpayers who are unable to pay all taxes due are encouraged to pay as much as possible. By paying as much as possible now, the amount of interest and penalties owed will be less.
2. Based on the circumstances, a taxpayer could qualify for an extension of time to pay, an installment agreement, temporary delay or an Offer in Compromise.
3. If you cannot pay the full amount, taxpayers should immediately call the number or write to the address on the bill they receive.
4. You may want to consider financing the full payment of your tax liability through a loan. The interest rate and fees charged by a bank or credit card company are usually lower than interest and penalties imposed by the Internal Revenue Code.
5. If you cannot pay in full immediately, you may qualify for a short amount of additional time, up to 120 days, to pay in full. No fee is charged for this type of payment arrangement and this option may minimize the amount of penalties and interest you incur.
6. You may also want to consider an installment agreement. This arrangement allows you to make monthly payments after a one-time fee of $105 is paid. If you choose to pay through a Direct Debit from your bank account, the fee is reduced to $52. Lower-income taxpayers may qualify for a reduced fee of $43.
7. To apply for an installment agreement you can use the Online Payment Agreement application available on the IRS website; file a Form 9465, Installment Agreement Request; or call the IRS at the telephone number shown on your bill.
8. In some cases, a taxpayer may qualify for an offer in compromise, an agreement between the taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.
9. Even if you set up an installment agreement, the IRS may still file a Notice of Federal Tax Lien to secure the government’s interest until you make the final payment.
10. It is important to respond to an IRS notice. If you do not pay your tax liability in full or make an alternative payment arrangement, the IRS is entitled to take collection action.

More information on the collection process is available at http://www.irs.gov.
Links:

• Payment Options - Ways To Make a Payment
• Other Ways to Resolve Tax Debt That Could Save You Money
• Online Payment Agreement Application
• Form 9465, Installment Agreement Request
• Publication 966, The Secure Way to Pay Your Federal Taxes 
• Publication 594, The IRS Collection Process"

And here is one more tax related link, to my friend Carla Howell's song about the subject:  "How Could I Live Without Filing Taxes":  http://www.centerforsmallgovernment.com/feature/how-could-i-live-without-filing-taxes/


Happy Tax Day!

Employee Business Expenses: you may deduct certain work-related expenses

Timely Tax Tips from our friends at the IRS:

Employee Business Expenses 

If you itemize deductions and are an employee, you may be able to deduct certain work-related expenses. The IRS has put together the following facts to help you determine which expenses may be deducted as an employee business expense.

Expenses that qualify for an itemized deduction include:

• Business travel away from home
• Business use of car
• Business meals and entertainment
• Travel
• Use of your home
• Education
• Supplies
• Tools
• Miscellaneous expenses

You must keep records to prove the business expenses you deduct. For general information on recordkeeping, see IRS Publication 552, Recordkeeping for Individuals available on the IRS website, http://www.irs.gov, or by calling 800-829-3676.

If your employer reimburses you under an accountable plan, you do not include the payments in your gross income, and you may not deduct any of the reimbursed amounts.
An accountable plan must meet three requirements:

1. You must have paid or incurred expenses that are deductible while performing services as an employee.
2. You must adequately account to your employer for these expenses within a reasonable time period, and
3. You must return any excess reimbursement or allowance within a reasonable time period.

If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages shown on your Form W-2. You must report the income and itemize your deductions to deduct these expenses.

Generally, report expenses on IRS Form 2106 or IRS Form 2106-EZ to figure the deduction for employee business expenses and attach it to Form 1040. Deductible expenses are then reported on Form 1040, Schedule A, as a miscellaneous itemized deduction subject to 2% of your adjusted gross income rules. Only employee business expenses that are in excess of 2% of your adjusted gross income can be deducted.
For more information see IRS Publication 529, Miscellaneous Deductions available on the IRS website, http://www.irs.gov, or by calling 800-829-3676.

source:  IRS Tax Tips, an IRS e-mail service

And if you have any questions for your friendly neighborhood lawyer, contact me at:

Doug Humes
humeslaw@verizon.net
610-525-7150

February Tax Revenues for Pennsylvania: the wages of sin

I receive monthly announcements from the Pennsylvania Department of Revenue on various tax related issues.  I wanted to share the one that just came through:  tax collections for the month of February.  It is interesting to see the relative amounts collected from each tax that the state levies.  The figures may be slightly distorted compared to the full year - there are seasonal fluctuations in revenues.  I imagine the personal income tax revenues jump in March and April, and then drop off after that, because people who owe have waited till April 15th to file.  The state of course continues to collect withholding and estimated tax payments, so income tax collections don't completely dry up after April; they return to a relatively fixed amount - with bumps every quarter when estimated taxes must be paid.  With that said, here is a snapshot of how much income the Commonwealth of Pennsylvania collected in February:

2011 Pa. Tax Collections
(in millions)                                        Feb          Feb

                                                           (actual)     (forecast)     (+/-)          (+/-%)

Sales Tax                                           573.9        581.5             -7.6           98.69%

Personal Income Tax                           671.4        695.1           -23.7           96.59%

Corporation tax                                     80.3          68.6            11.7          117.06%

Inheritance Tax                                     62.0          56.8             5.2           109.15%

Realty Transfer Tax                               15.2          15.7             -0.5           96.82%

Sin Taxes (alcohol, cigarettes, etc.)      104.0         112.2           -8.2            92.69%

Non-tax revenue                                    23.7           21.2            2.5           111.79%

     Total General Fund Revenue      1530.5       1551.1          -20.6            98.67%

Motor License Fund                             135.6         160.3          -24.7            84.59%

     Total monthly revenue               1666.1       1711.4          -45.3            97.35%

The Motor License Fund (MLF) revenues are the under-performer of the month.  What are these funds?  Here's the explanation from PennDOT:

The MLF is the constitutionally protected account that is used to fund the commonwealth’s highway program. MLF revenues consist of fuel taxes, license and registration fees, fines and penalties, and misc. sales.

While most of the other tax revenues go into the General Fund, the Motor License Fund revenues are earmarked for highway related expenses:  maintenance and repairs, bridges, turnpike, state police.

We are definitely lagging in our sin taxes.  I expect them to be counter-cyclical - in hard times people may escape through cigarettes, booze and gambling.  But in February at least, the sin tax collections are down by 7%.

You smokers, drinkers and gamblers - you're not pulling your weight.  Go and sin some more.

DEALING WITH A HOME THAT YOU CAN NO LONGER AFFORD

You bought a home, took out a mortgage loan, and looked forward to the seemingly guaranteed rise in the real estate values of the decade of the 2000’s.  Then came 2007, and the recession, the drop in the stock market, and the plummet of the real estate market.  Homes that were purchased in mid-decade, when the bubble was fully inflated, are now “under water”:  their value is less than the mortgage loans that were taken to buy them.  If you bought a home for $500,000 in 2005, and took a loan at 90% of the value, then you have a loan balance of about $450,000.  If that house now sells for $400,000, then at closing you are going to need to come up with $50,000 to sell the home.  The situation was compounded if you took out a home equity loan – and financed 100% of the value of your home.  And of course, if you or your spouse have lost your job, then your ability to even keep up with the payments may be compromised.  While we all may buy that Powerball ticket each week and hope that it is the answer to our financial distress, all of us but the one winner must ultimately deal with the situation on the ground:  what are the options for getting out of a home that you can no longer afford?  In Pennsylvania, here is the general lay of the land.

With a mortgage loan, a borrower typically signs a promissory note and mortgage.  (In some commercial transactions, the loan may be “non-recourse” against the borrower, but that is rarely the case with a residential loan.)  The borrower promises to pay on the note, and if not, the lender can sue on the note or foreclose on the mortgage.  Generally they choose foreclosure – because the property has a certain value; and the borrower who is not paying on the note generally is not doing so because they cannot do so.  If the lender takes the property through foreclosure and sells it for less than the amount of the loan, then in theory they are entitled to seek the deficiency from the borrower.  They have to file that action within six months after the foreclosure sale.  If they don’t then they are barred.  The decision to do so is a business decision, and depends on whether they think the borrower can pay.  No use spending the money on seeking the deficiency, if they are unlikely to recover anything more.

Sale:  To avoid foreclosure, the borrower can first try to sell the property.  If there is equity in the property, that is if the sales price is more than the combined mortgages and transaction costs, then upon sale, the mortgage is paid, and the borrower gets the equity.  That’s the best case. 

Short Sale:  In our current market, many properties are worth less than the amount of the mortgage – they are “under water”.  In these cases, the borrower may want to negotiate a “short sale” with the lender.  A short sale is a sale for less than the amount of the mortgage balance, with the lender agreeing to accept less than the full amount of the outstanding loan balance.  The borrower markets the property, finds someone who makes an offer, and then takes that offer to the lender and negotiates with them to see if they will accept some lesser amount.  Each lender has its internal guidelines; they are dealing with these issues every day and know the market is soft.  So, lenders typically are willing to negotiate a short sale arrangement with a borrower who does not have the financial means to pay the shortfall.  Check with your lender to learn about what they are offering before starting the process.

Debt Forgiveness Can Be Taxable:  When a person is released from debt that they owe, that is generally treated as income to the debtor.  If someone tells you don’t have to pay the $50,000 you owe them, the IRS considers that you have received $50,000, and so you pay income tax on it.  In a short sale, you are being forgiven debt.  You might have to pay income tax on that amount.,  However, when the current mortgage crisis began, Congress passed the “Mortgage Forgiveness Debt Relief Act of 2007”, which essentially provides that if the debt forgiveness relates to acquisition costs for your home mortgage, then during the time this temporary law remains in effect (currently through 2012), the debt forgiveness will not be treated as income (with certain limits and conditions).  When considering a short sale, take this into account.

                                                                                          

Deed in Lieu of Foreclosure:  If the borrower cannot find a willing buyer for the property, then the next step may be to try to negotiate a deed in lieu of foreclosure with the lender.  The borrower is essentially telling the lender “I won’t fight you on the foreclosure; in fact, I’ll just give you the deed to the place.”  The lender saves the costs of foreclosure, but steps into your shoes as owner and takes the property subject to whatever other liens are on the property.  If the lender goes through foreclosure, then they are in the front of the line for lien priority – they typically have the “first lien” ahead of everyone else except federal and state taxing authorities, and a six month homeowners association lien (where applicable), and so for them, it may make more sense to simply go through with the foreclosure, and strip the other junior liens off the property.    To the extent there are not lots of other liens on the property (determined by a title search), then the lender may be interested in negotiating a deed in lieu of foreclosure.  In some cases, they may also allow you to remain in the property under a lease.  However, the lender is not in the business of owning property; they turn around and re-sell it.  If they re-sell for less than the loan balance, then there is a deficiency that is the borrower’s obligation.  Unless the borrower has been able to get the lender to agree to forgive any or all of the deficiency, then borrower is still obligated to pay the deficiency.  So, the deed in lieu transaction, without debt forgiveness, does not do a great deal for the buyer, other than to stop the ongoing default and piling on of interest, late charges, and attorneys fees. 

Loan Modification:  A lender may also consider a loan modification to make it easier for a borrower to pay the loan.  You need to ask the lender whether they would entertain a loan modification, and explore what they are offering.  There are also federal programs in place to encourage this.  Check out the “Making Home Affordable” program at http://www.makinghomeaffordable.gov/.  This government site explains various options, including modifications, refinance, and relocation assistance.  They also encourage short sales and deed in lieu transactions through the Home Affordable Foreclosure Alternatives (HAFA) Program.  
Not every option works for everyone, but you just need one that works for you. 

Fight the Foreclosure:  If a loan is in default, and the lender has begun foreclosure, then a borrower may choose to fight the foreclosure.  Since the main issue is “are you paying the mortgage loan”, and the answer is almost always “no”, the borrower is usually going to lose the legal battle relatively quickly.  However, there are times when a loan has been sold several times, and the paperwork has been lost or improperly done, and a savvy lawyer may be able to construct an argument on why the foreclosure may be ineffective.  In the rare instance, that can stop the foreclosure process.  However, typically the obligation under the note is intact, and so the lender can sue under the note as well. So, this is largely a delaying action, and only postpones the day of reckoning.  And, you must pay a lawyer to do this for you.  At the end of the process, the bank owns the home; when they sell the home, if they collect less than what is owed (loan balance plus transaction costs), then the lender may seek a deficiency judgment against the borrower.  In Pennsylvania the lender has six months following the sale to seek that remedy; otherwise it is barred.  The decision to do so is simply a business decision – do you have money, and is it worth the additional time and effort of the lender to try to collect it from you? 

Bankruptcy:  The borrower’s last line of defense is to file for bankruptcy.  The lender with a valid first mortgage on the property is not going to go away in bankruptcy.  They are a “secured creditor”, and so while bankruptcy can help a borrower by giving them time, and by discharging the unsecured creditors for pennies on the dollar, it still does not shake off the secured first mortgage lien.  A chapter 7 bankruptcy is a “liquidation”:  your assets are identified, and used to pay off your debts, until the money runs out, and the unsecured balances are discharged.  Secured creditors are protected and after some initial delay are permitted to complete their foreclosure.  A chapter 13 bankruptcy allows you to pay back your debts in a proposed payment plan over 3-5 years.  While it does not reduce your first mortgage loan, it can help your situation by stripping out a home equity loan balance, it can reduce or eliminate debt owed to unsecured creditors, and can give you time to pay your arrears on the first mortgage.  So, a Chapter 7 bankruptcy is a delaying action (measured typically in months, not years), but it may also bring the lender to the negotiating table for one of the other remedies – a modification, short sale, or deed in lieu.  A chapter 13 bankruptcy gives a borrower more options, depending on their income and their debts, and so can be useful for the borrower who is up to their waist in debt, but not up to their ears or over their head. 

Your Credit Rating:  In each of these cases, the borrower may also be concerned about their credit rating.  When the borrower fails to make payments on a loan, those failures are reported to credit rating agencies, and start impairing the person’s credit.  A bankruptcy does this as well.  If the borrower is still paying the loan on time while they are negotiating, then they are not impacting their credit.  However, for some remedies, the lenders will not negotiate with a borrower unless they are in default.  So a borrower has to go in to default simply to open the door to the future negotiations.  If that negotiation is successful, then the failure to pay continues only for a short period, and the borrower can always submit a note of explanation to the credit ratings agencies that explains the cause of the default.  That does not necessarily remove the “stain” of the default, but may help to bleach it a bit.

State Specific Programs:  Each state is developing its own programs to try to help citizens dealing with these problems.  Here are five ways that Pennsylvania is trying to help (as reported at eHow - see link at bottom) :

1. Contact the Pennsylvania Housing Finance Agency’s (PHFA) Foreclosure Mitigation Counseling Initiative. The Foreclosure Mitigation Counseling Initiative was established to provide homeowners free financial counseling to find a long-term solution to preventing the house from going into foreclosure. They will analyze the homeowner’s financial situation, as well as the current value of the property in question.

2. Look into the Homeowners’ Emergency Mortgage Assistance Program’s (HEMAP) non-continuing mortgage assistance loan. This loan is provided by the state and is ideal for homeowners who are able to make their current payments, but can not catch up on back payments still owed. The loan would have to be repaid with a minimum payment from $25 per month up to 40% of the homeowner’s gross income.

3. Apply for a HEMAP continuing loan. A continuing loan is for homeowners who have a back owed amount, and are unable to make their current payments at the present time. This is a loan, which must be repaid. It is limited to a maximum of 24 months and $60,000.

4. Refinance to an Affordable Loan Program (REAL).

[The REAL and HERO programs concluded on December 31, 2010. Applications are no longer being accepted.]

5. Homeowner’s Equity Recovery Opportunity Loan Program (HERO).

[The REAL and HERO programs concluded on December 31, 2010. Applications are no longer being accepted.]

Read more at eHow:  How to Stop Foreclosure in Pennsylvania 

For a wealth of other information on programs in Pennsylvania, go to the Pennsylvania Housing Finance Agency website. 

CONCLUSION

Sorry!  There are no easy answers.  But there are a variety of programs, and a variety of remedies available.  You need to educate yourself on what ones may work best for you.  Assess your situation, and then contact your lender, or a government assistance agency, to begin the process of finding out what’s right for you.  You are likely to be dealing with large and inefficient bureaucracies.  Remember that the people on the other end of that phone are dealing with hundreds of people with the same financial problems as you every day.  Don’t treat them rudely and try to terrorize them into responding to you.  They have piles and piles of documents just like yours, and they can decide which ones to process and one ones go to the bottom of the pile.  But, don’t be afraid to ask for names, and keep notes of every phone call.  Write follow up notes confirming important conversations.  When you personalize the contact, you create a relationship with a person, but you also hold them accountable for what they tell you.  It is more effective in future negotiations to be able to tell them exactly who you talked to, on what day, at what time, and what they said, then to simply complain that “somebody told me it was okay”.  Stay organized.  Large bureaucracies have lots of places for your file to hide.  Scan documents so that if you are asked to re-send them, you already have them scanned and in a legible form, and you reduce the frustration of jumping through the same hoops over and over again.  That is likely to be part of the process.  Don’t rage against it.  Bend with it and bounce back.  Give them exactly what they want and make their job easier rather than harder. 

You are in a hole.  You need to dig your own way out, and you need to do so one shovelful at a time.  Keep focused on the goal.   Control what you can control.  Let go of what you cannot control.  Buy the weekly lottery ticket, but until that hits, you need to do what you need to do to dig your way out.

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice at the Millridge Manor House in Bryn Mawr, Pennsylvania.  You can contact him at Tel: 610-525-7150, or via email at humeslaw@verizon.net.

The Estate Tax is Back!

Beginning in 1916, the federal government began taxing the estates of those who died each year.  Without more, people could on their deathbed give away their entire estate by gift, thus evading the estate tax.  So, the next move was to tax gifts made during life – this was added to the tax structure in the 1930’s.  At the higher estate levels subject to these taxes, the next planning device was to make gifts that skipped a generation or two.  Gifts of accumulated wealth to a grandchild or great-grandchild moved the wealth past one or two generations without taxation.  So that hole in the system was plugged with the generation skipping transfer tax – which then taxed those transfers which otherwise would have skipped a generation or two of estate taxes.  By 2001, the three-legged system applied to estates over $1 million, and applied a highest tax rate of 55% to those estates. 

In 2001 Congress enacted changes to the estate tax:  they gradually raised the exemption amount from $1 million to $3.5 million, and lowered the highest tax rate to 45%.  In 2010, the estate tax (but not the gift tax) was eliminated entirely.  In 2011, the system that was in place in 2001 was scheduled to return unless Congress acted.  In the last days of the lame duck Congress, they finally acted, and so the estate tax is back.  For estates of those dying in 2011 and beyond, if you have an estate of over $5 million, then you will pay estate tax that reaches a top rate of 35%.  Below that amount, there is no federal estate tax due.  (But remember that you are not home free in that circumstance, as many states still have an estate or inheritance tax in place.)  

In 2001, the total federal estate tax returns filed were 108,071, of which 51,736 were taxable.  In 2009, the total returns filed were 33,515, of which 14,713 were taxable.  According to the New York Times, “less than one-half of 1 percent of people who die in 2011 will be hit by the estate tax.”  Clearly, fewer estates are being taxed because of the higher exemption rates.  However, the change is not yet permanent:  Congress has kicked the can two years down the road.  In 2013, the 2001 rates and levels will arise from the dead, unless Congress acts again.  Will they act in 2012?  That’s a presidential election year, and so it is more likely that they will not act, and we will again be playing chicken with the estate tax after the 2012 election.  But, we have some certainty for the next two years, and those to whom the revised estate tax law may apply can now plan accordingly.  For the rest of us, the estate tax is a non-issue for the next two years.  But keep your eye on that can!

©2011  Douglas P. Humes

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice in an old mansion in Bryn Mawr, Pennsylvania.  Contact him at Tel: 610-525-7150, or via email at humeslaw@verizon.net.