Personal Wealth Law News

For many members of the Baby Boom Generation, retirement is now approaching, and it’s a good idea to look more closely at what needs to be done in the few years before retirement:

1. Have wills been updated? At this point, they should be reviewed at least every three yers.

2. In addition, are the durable general powers of attorney to cover financial matters and healthcare directives up-to-date?

3. Are beneficiary designations for retirement plans, individual retirement accounts and life insurance policies current, and do you know where copies of those beneficiary designations are located?

4. Do you have long term care insurance to cover the escalating cost of nursing home and home health care, or have you considered it?

5. Have you considered where you will retire, and have you compared your expected retirement income with the likely expenses in retirement?

6. Are you familiar with the benefits available from Social Security and Medicare, and the opportunity to purchase health insurance as a supplement to Medicare?

 * Gloria Swanson in Sunset Boulevard 

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What is a fair rate of tax and exemption for the federal estate tax? It’s a matter of opinion, of course, but, based upon experience with many business owners and others who have accumulated wealth, here’s a suggestion: the tax rate should permit someone who has worked to acquire a substantial level of wealth to have enough to pass on to the next generation, so that they can enjoy some of the fruits of the labor of the older generation, but not so much that their need to have productive lives is taken away. What is that rate of tax? A tax rate ranging from 15% to 35%, after an exemption of $5,000,000, indexed for inflation, would probably cover only a small number of people but still raise the substantial amounts of revenue needed for government functions.  As it happens, those are the numbers now being considered for a resolution of the future of the estate tax, at least among those who have given up the impractical dream of repeal.

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Taxes remind me of the Woody Allen joke about the guy who complains to a friend that his brother thinks he’s a chicken. When asked why he doesn’t take his brother to a psychiatrist, the guy says he would, “but we need the eggs.” Taxes have a negative effect on the growth of the economy, but we need the money to do all the things we expect government to do. Some people complain, and perhaps rightly, that government tries to do too much, but what they really mean is that government tries to do too much for other people. Again, political candidates often discuss the fairness of taxes- a fair tax being one that neither the candidate nor his contributors have to pay. Is the federal estate tax a fair tax? The answer is clearly yes, no or maybe. What does seem clear is that the federal estate tax is a less painful tax than others, being imposed on fairly high levels of wealth. It couldn’t really be argued that it restricts anyone’s basic lifestyle, unless the basics include a home on the Riviera. Again, it sometimes, but not often, taxes again assets that have already been subject to income tax- the dreaded double taxation scenario. But actually, we are already subject to repeated tax on the same income earned: federal, state and local taxes, sales taxes, Social Security taxes, real estate taxes; so that doesn’t make the estate tax unique. If there’s a justification needed for the federal estate tax, it’s this: it produces a large amount of tax revenue, which we need, from people who suffer the least from paying it. But what level of federal estate tax contains both elements of fairness and adequate revenue? See the next post for a suggestion.

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Several more pressing issues, including the Iraq war and the Presidential campaign, seem to have pushed discussion of the federal estate and its possible repeal off the radar in Washington, D.C. and in the rest of  the country. We’re now at a point of having a $1,000,000 lifetime gift tax exemption and a $2,000,000 federal estate tax exemption at death, with rates still in the mid-40% range. The exemption will rise to $3,500,000 in a few years, then for one year the tax will disappear (2010- the take Granny on the roller coaster year), after which the rates revert to their levels before the 2001 changes: much higher rates and a much lower exemption. This strange tax situation was thought to be so bizarre that it would certainly be amended, but the change back to the old rates and exemption is automatic in 2011- it doesn’t require any further Congressional action. If the 2008 election results in gridlock, we might see just the doomsday scenario that no one could imagine. If one party will accept only repeal and the other won’t agree to higher exemptions and lower rates, that could be the future of the estate tax.

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A humorous document has appeared on numerous web sites, purporting to be issued in the form of a Notice published by the Internal Revenue Service, which provides a definition of the term “death” for the purposes of Section 409A of the Internal Revenue Code. For those of you uncertain about the meaning of death (or life), this notice can be found at http://benefitslink.com/articles/guests/notice_2007_90_rev.pdf.

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