Community and Separate Property: Determine Your Own Fate With an Agreement

December 18th, 2010
182px People together.svg  Community and Separate Property: Determine Your Own Fate With an Agreement
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Click for Diedre’s full just-published response to a question at the intersection of trust law, capital-gains taxes and community/separate property at

Diedre just responded a moment ago to a question on, the lawyer-rating service. The querent wanted to know if property in a joint revocable living trust is community property for purposes of receiving a full step-up in capital gains tax basis upon the death of the first spouse.

Diedre’s answer provided several alternatives to ensure that property receives the desired characterization — whether community or separate — with a reminder that what’s effective for tax law will also be enforced by a divorce court.

A quick primer on capital gains law for readers new to this area of taxation:

If a married person owns separate property with built-in capital gains (meaning the market value of the property is higher than what the person paid for the property), that gain (the difference between the purchase price and the sales price) would be subject to capital-gains tax upon the sale or disposition of the property. When the married property owner dies, all of that built-in capital-gain disappears for tax purposes. In other words, while the now-deceased owner would have paid tax had he or she sold during life, the inheritor-spouse will only be subject to capital-gains tax on any gains that occur AFTER the initial spouse’s death. But if it is the non-owning spouse who dies first, the owning spouse receives NO capital-gains tax relief.

Capital gain in community property that would be subject to tax during both spouses’ lifetimes disappear when EITHER spouse dies. This is even better than the treatment a surviving spouse would get if the IRS characterized the property as half the husband’s and half the wife’s. In that case, only the decedent’s half gets a step-up to fair market value when one spouse dies.

In other words, community property, which is available in nine states (and possibly to residents of the other 41 states through the use of an Alaska Community Property Trust), provides a tax benefit that can be worth a substantial sum — especially if the assets have been held for a long time, seeing years of gains.

For additional information on these topics, check out:

P.S. If you click over to the article and enjoy, please give it a thumbs up! And if you’re a client of Wachbrit Braverman PC and are willing to share a positive experience, please leave a review at AVVO. One or two sentences would be great!

© 2010 Diedre Braverman. Reproduction of this article in full is permitted for any purpose and in any format so long as the author is acknowledged and a link to this website or to Wachbrit Braverman PC is included in the reproduction. The author’s name and link must appear in the same or larger font size as the article body. Reproduction in part is permitted upon the written consent of the author. All other rights reserved.

Estate Tax Not Repealed For Long

June 17th, 2010

The good news is the estate tax is repealed! The bad news is, not for long. Since Bush’s 2001 tax cuts went into effect the exemption from estate taxes climbed year by year from $1 million to a high of $3.5 million in 2009. This year, 2010, is the repeal year but President Bush could never garner the 60 votes he needed in the Senate to make the repeal permanent. death tax Estate Tax Not Repealed For LongThe consequence is the so-called “sunset” rule. As of January 1, 2011 the law automatically goes back to the way it was in 2001. In the case of the estate tax that means only a $1 million exemption and a top 55% tax rate.

The Obama Administration advocates extending the 2009 exemption of $3.5 million permanently. This appeared to be where the Senate was headed on May 18th when an agreement was reached that had the support of more than 60 Senators. But the deal fell apart when the Democratic leadership decided that it will not allow the legislation to come to the floor for a vote unless the legislation has the support of more than half of the Democrats’ 59 votes. Since the Democrats lack 50% support within their party the legislation failed. Regardless of whether the Senate acts, there will be an estate tax next year. Full repeal is not under consideration. The only question is whether the exemption will be $3.5 million or $1 million –and $ 2.5 million is a huge difference in the plans for millions of families including many many of our clients.

For the full story click here.

Estate Planning Attorney Survey Results

March 12th, 2010
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One of the largest and most respected attorney organizations in the country is called WealthCounsel.  They just released their Third Annual Survey of Industry Trends and there were some results that I thought you might be interested in hearing about.  Since this group is exclusively “by attorneys” and “for attorneys,” it isn’t very often the general public gets to see our inside information.  Let’s take a peak…

While many businesses are down, 40% of the attorney’s said their business had increased – at least in the estate planning area.  Why?  More people were focused on updating and getting some plans in place to hold onto more of what they had after many had lost a bundle due to the economic crisis.  This was not only good for the attorneys but was very good for their clients to get an update and better plans in place. (Especially true in California where we got four new statutes in 2009 alone that affect every estate plan.)

The survey asked attorneys what is the number one reason why people plan – make your guess now. <drum roll>  The number one reason was to avoid probate and minimize estate taxes.  Probate starts at 8% of the gross estate and estate taxes may reach as high as 55% of the net estate.  It’s no wonder they’re planning.  Another major factor that motivates people to do their planning is to avoid the answer to the question, “What would happen if they don’t plan?”  Most attorneys expect to see an increase in activity as the population of baby-boomers starts aging – which has already begun.

Wachbrit Braverman PC is well positioned to serve this baby-boomer population because of our strengths in asset protection planning for next generation and in special needs planning, two key motivators.  And when we started the firm, we worked with many young families who are older families now (yes, it’s been over 10 years!) so we’re very familiar with many of the issues boomers are facing.

I have the privilege of being part of this wonderful group of attorneys where I get to share ideas and insights to help my clients from San Diego to San Jose.  I have been a part of Wealth Counsel for eight years, and each year brings more great ideas than the previous one.  I feel honored to be a part of such a wonderful group of attorneys and am proud to call them my friends.

 Estate Planning Attorney Survey Results

Congress May Impose Retroactive Estate Tax

February 8th, 2010
300px IRS.svg Congress May Impose Retroactive Estate Tax

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There is currently no tax on the estates of those dying during 2010. Although Congress may reinstate the tax retroactively in 2010, perhaps as part of broader tax reform, this is by no means a certainty.

If Congress fails to act, a few thousand very wealthy families will have reason to celebrate, while tens of thousands of taxpayers of more modest means will pay capital gains on inherited assets — and executors will face additional and confusing administrative burdens. And if Congress does change the law retroactively, extensive litigation over inheritances is almost guaranteed.

Congress has had nine years to prevent this from happening but hasn’t been able to. Under the provisions of a Bush-era tax-cut bill enacted in 2001, the value of estates exempt from the tax has been gradually raised over the past eight years while the tax rate on estates has been reduced, so that in 2009 only an individual estate worth $3.5 million or more is taxed, at a rate of 45 percent. For the year 2010, according to the 2001 law, the estate tax disappears entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more, which is where things stood before the 2001 change.

Loss of Step-Up Means Step Down for Many Taxpayers

The catch for taxpayers of more modest means, however, is that for 2010 the estate tax is replaced with a 15 percent capital gains tax on inherited assets that are later sold. Normally someone inheriting property at an individual’s death gets a “step-up in basis” in the property. That is, the value of the property for determining capital gains tax due is calculated at the time it is inherited, not when it was originally bought.

But the law eliminating the estate tax in 2010 also largely does away with the basis step-up rules. This means that those inheriting estates will have to pay capital gains taxes on any assets sold based on the original price paid for the asset, after an exemption for the first $1.3 million in capital gains (plus $3 million for assets transferred to a surviving spouse).

Let’s say your father dies and leaves you a home worth $1.5 million and a $500,000 portfolio of stocks purchased at various times over the past 40 years. If you decided to sell any of these assets, you’d normally pay little or no capital gains tax on the sales. The new provisions mean that you have to calculate capital gains based on the value of the home and the stocks when your father bought them, not when you inherited them. That could be very expensive, not to mention time-consuming in trying to ascertain the original price your father paid for everything.

“If we do not extend our estate tax law, all taxpayers, all heirs will be subject to massive, massive confusion in trying to determine the value of their underlying asset,” Senate Finance Committee Chairman Max Baucus (D-MT) said on the Senate floor.

The chief tax counsel for the House Ways and Means Committee estimates that while extending the 2009 estate tax law would affect about 6,000 estates, 71,400 estates could face new capital gains taxes if the estate tax disappears. According to the Center on Budget and Policy Priorities, “at least 62,500 of these are estates that would not owe any estate tax if the 2009 rules were continued and that thus would be adversely affected by estate tax repeal. Farm and business estates would constitute a disproportionately large share of this group.” Small farms and businesses are the groups whose interests opponents of the estate tax have claimed they are defending.

Couples With Credit Shelter Trusts at Risk

The new world of no estate tax places at particular risk couples who have so-called “credit shelter” or “bypass” trusts that are designed to allow both spouses to take advantage of their respective estate tax exemptions. These are common arrangements used in estate planning for married couples. With the estate tax gone, the wording of these trusts could be interpreted as completely bypassing the surviving spouse when the first spouse dies, meaning a surviving spouse would get nothing without the expensive process of claiming her “elective share.” For explanations of all this, click here and here. Married couples with such trusts should consult their attorney.

The House passed a bill in early December permanently extending the 2009 estate tax rules, which will bring in an estimated $25 billion for 2009 by imposing the 45 percent rate on estates over $3.5 million (or $7 million for a couple). The Senate’s Democratic leadership wanted to pass a similar bill and put it on President Obama’s desk before the estate tax expired at the end of 2009, but they were blocked by united Senate Republicans who prefer a lower tax rate of 35 percent and a higher exclusion amount of $5 million ($10 million for couples).

The Perils of Going Retroactive

Sen. Baucus has pledged to try to restore the estate tax retroactively in 2010. This would undo the capital gains increase, but it could also create fertile ground for lawsuits by those whose family members die between January 1, 2010, and the date when any retroactive law is enacted.

“I can guarantee this: if they succeed in getting retroactive in hiking the death tax from zero to 45 percent, there are going to be lawsuits,” said Dick Patten, president of the American Family Business Foundation, which opposes the estate tax. “Its going to be messy, its going to be noisy.” (For an excellent discussion by of the mess that a lapse in the estate tax could create, click here. “Beneficiaries will deal with uncertainty for years,” warns one tax expert.)

In a 1994 decision, the U.S. Supreme Court ruled that the Constitution’s ban on the enactment of ex-post facto laws doesn’t apply to tax legislation, provided the retroactive application is “supported by a legitimate legislative purpose furthered by rational means”. United States v. Carlton, 512 U.S. 26 (1994). Since most estates don’t file tax returns until about nine months after someone dies, if Congress can come to an agreement quickly in 2010 the problems caused by a retroactive law may be limited. But notes that “The pressure to reach agreement may breathe new life into” the Republicans’ “compromise proposal” of a 35 percent tax on couples’ estates worth more than $10 million.

For more on the implications of the disappearance of the estate tax, see CBS MoneyWatch’s “Estate Tax: What You Need to Know for 2010,” SmartMoney’s “The Federal Estate Tax Is Dead: Now What?,” and Kiplinger’s “FAQs on the Death of the Estate Tax.”

For ClientCare Members, anticipate an update to ensure that your family can take full advantage of the limited step-up in basis.

 Congress May Impose Retroactive Estate Tax

The Best Beneficiary: The Retirement Trust

September 29th, 2009

Why do I like Retirement Trusts best of all beneficiaries for retirement assets? Because unlike any other beneficiary, with an Irrevocable Retirement Trust, we can achieve every objective clients have for their estate planning. (Although the trust has to be irrevocable — according to one case in Kansas — it’s easy to replace it with a new trust as long as the plan participant is alive and well.)

We can achieve estate tax planning goals by keeping the first spouse’s retirement assets out of the second spouse’s taxable estate; especially valuable if the retirement plan is a substantial portion of the estate. This is applying the A-B formula that allows married couples to double the amount they can pass on to beneficiaries free of estate tax to retirement assets.

We can maximize the income-tax deferral benefits of the retirement asset by ensuring that the stretch-out is fully utilized. (That means that your beneficiaries can withdraw and pay tax on the retirement plan over the course of their entire lives, rather than all at once.  If they have to withdraw it all right away, it may put them in a higher tax bracket so that they have to pay very high income tax rates on the inheritance.  Imagine a $1M IRA reduced to $650k through income taxes.  Imagine the beneficiary finding out that it was avoidable…)

We can provide asset protection, divorce protection, remarriage protection and disinheritance protection to all beneficiaries, from the spouse to the grandchildren. Unlike in an RLT’s conduit trust provisions (at our firm, a standard clause we include that, in some cases, allows a stretch-out), a Retirement Trust can contain Accumulation Trust provisions that allow the trustee to accumulate required minimum distributions inside of the trust instead of distributing them to the beneficiary each year. This allows true protection because there is no right to attach or take away.

Two cases (one from Delaware – a powerful state), have recently held that an inherited retirement plan has NO asset protection on its own.  Listen, while you own your own retirement plan, you get great asset protection, especially if that retirement plan is under ERISA — 401(k)s, 403(b)s, etc.  If you get sued or go bankrupt, your entire 401(k) is protected (the protection for contributory IRAs is limited; comment below if you want details), no matter how big it is.  Your beneficiaries don’t get this protection.

Finally, we can ensure the asset is never accidentally probated. You may wonder how it could ever be probated.  All it takes is for the primary beneficiary to fail to complete her own beneficiary designation form.  Or the custodian could lose the designation form.  Or you could name a minor child as a beneficiary.  Lots of paths to probate.

The Irrevocable Retirement Trust is an estate planner’s dream for her clients!  DEFINITELY consider it if your retirement assets make up more than 20% of your total estate or exceed $300k.

 The Best Beneficiary: The Retirement Trust

Who Should Be The Trustee Of The Special Needs Trust?

September 28th, 2009
2532145933 5758313ae4 m Who Should Be The Trustee Of The Special Needs Trust?
Image by mrkathika via Flickr

This may be the hardest, most important question you will face in the entire estate planning process. If your child is young, the guardianship question is probably harder and more important but this is a close second! I say this not to intimidate you but to reassure you that hundreds of our clients have been in your very position before and every single one of them has found a solution.

We can go into greater detail on any of these in the comments or on a future blog, depending upon demand, but for now we’ll look at a brief overview of your options:

Your Parents: they might be great as a temporary solution but in the natural order of things, they will not live long enough. This Special Needs Trust needs to last for your child’s entire life.

Your Siblings: while they can be a great choice for initial trustee or successor trustee after you, they too will probably not outlast the trust. But they can manage it while we wait for other candidates to, literally, grow up.

Your Other Children: this is a mixed bag. While they are the same generation as your child with special needs, there’s no predicting who will outlive whom. Then there is the burden. You may be counting on you other child(ren) to visit or even to act as Guardian/Conservator to your child with special needs. The job of Trustee, done properly, is an onerous one, fraught with liability. Finally, if your child with Special Needs has more than one sibling you MUST consider family dynamics. Can you name them all as co-trustees, or will that be placing your Beneficiary in the eye of an endless hurricane? If you choose one, how will the other(s) react to “the chosen one” and to the Beneficiary?

Your Special Needs Trust Attorney: in limited cases, I will agree to act as a successor trustee for clients. It often makes sense when naming family does not, and the clients want more personalized attention than a bank can provide. Of course, since I’m mortal, my back up is usually…

A Bank or Trust Company: their minimum trust sizes range from $300,000 to $1M, with the vast majority of banks, brokerage houses, and trust departments either refusing to accept Special Needs Trusts or setting their minimum at $1M. They have one big advantage and that is “deep pockets”; however, in my experience, it’s very hard to get anything out of those pockets because they will not accept a trust that holds them to a standard of accountability that is any higher than “gross negligence“. Gross negligence is very difficult to prove because it goes beyond all kinds of mistakes that no one in their right might would make to mistakes that are just outrageous.

Sometimes a combination makes sense. For example: the estate planning attorney together with the brother of the beneficiary. Then, whichever of them lives the longest with a bank that has a stellar trust department reputation. Then, the bank alone with a Care Manager-style Advocate for the rest of the Beneficiary’s life.

If you find yourself more confused about your choices than before you read this post, don’t be alarmed. That’s just because you realize you have more choices than you thought.

Many a client has resolved an “impossible” situation in my office, not because I have the answer but because I have learned to ask great questions over the years.

So come in, have a cup of coffee with me and let’s take on your toughest choice together. I promise it will be time well-spent.

 Who Should Be The Trustee Of The Special Needs Trust?

The Coming $1M Exemption

September 16th, 2009

Many professionals reasonably believe that Congress could never do anything as outrageous as allowing the Permanent Estate Tax Repeal to expire completely on December 31, 2010 and return the exemption to where it was in 2001, when the Repeal was passed.

I believe they could. In fact, a growing number of professionals are coming to believe that expiration of the Estate Tax Repeal is our most likely future.

One plausible scenario was painted by Stan Miller, a Principal with Wealth Counsel at that estate planning organization’s national annual symposium, which I attended last month. Imagine, Mr. Miller posited, a late 2009 in which Congress is facing a 2010 with no estate tax, followed by expiration of the Repeal (what one of my clients called a “throw momma from the train” year).  Further imagine that Congress is continuing to approve expensive stimulus packages while economic pressures and public pressures to hold tax increases down are strong.

The proponents of full repeal have no incentive to compromise: their billionaire constituents don’t care about the difference between a $1M exemption and a $4M exemption. The proponents of higher taxes have no incentive to compromise, they just have to wait for expiration of the Repeal.

So Congress, to avoid the “throw momma” social policy problems and the nightmarish capital gains basis problems that we will face in just a few months if they do not act, could enact a one-year”patch”. They could extend the $3.5m exemption through December 31, 2010, and then… do nothing. Allow the Repeal to expire.

I certainly understand the optimism of many clients who expect more from their elected representatives. But when 2011 rolls around, we’ll be standing by with our toolkit of estate tax planning strategies for those clients who find themselves suddenly, and taxably, “wealthy.”

 The Coming $1M Exemption

Welcome Back To Our Estate Planning Blog!

September 4th, 2009

Welcome to the newly redesigned blog. The redesign of the blog is part of an effort to redesign the entire website, which grew out of the many changes that led to our new firm name. No longer The Law Office of Diedre Wachbrit, APC, this email is coming to you from Wachbrit Braverman PC.

And the lead attorney is not Diedre Dennis Wachbrit, single mother.  Instead, it’s Diedre Wachbrit Braverman, remarried mother of two fourth-graders. I changed my name when I wed Bennett Braverman, of Boulder, Colorado, in May. Bennett is also an estate planning attorney, and the kids just love him.

I have another big change to tell you about before I get down to the serious business of blogging about legal topics. (I’ve got some good ones already written for including a three-part series on a topic that generates a lot of questions: retirement plan beneficiary designations!)

The other big change is that our firm once again has an Associate Attorney, Mrs. Annabel Blanchard Spatola. A recent law school grad, Mrs. Spatola decided early on that she wanted to focus on estate planning and related areas. We are fortunate to have her because she is a quick learner and she shares the team’s dedication to client service, integrity and the right result, every time.

So please consider this blog a resource for learning (use the comments area for questions), and for sharing. We will continue to email you blog snippets but if you want to see blog articles as soon as they’re published, subscribe to this blog using an RSS reader.

- Diedre Wachbrit Braverman

Special Needs Planning Q&A with Diedre Braverman

August 24th, 2009

Welcome back to our newly redesigned and rededicated website and special needs planning blog!  It’s still under construction so please check back frequently for new blog posts and lots of new features like an active and current blogroll, a useful search feature, the ability to add this blog to your favorite RSS reader, and whatever other cool toys I come across in the WordPress toybox.  And please, leave comments and suggestions! Tell me what other blogs or websites on special needs you read! Your feedback is more than welcome.  It’s essential.

Diedre Wachbrit Braverman

A few days ago, I represented The Academy of Special Needs Planners, of which I am one of three co-founders, in answering reader questions from one mother’s blog.  This very busy mom writes about raising her child with special needs including the legal aspects, like special needs planning.  When she offered to do legal Q&A, the floodgates opened!  You can read all of her readers’ questions and my answers on Ellen’s blog: To The Max: Take That, Cerebral Palsy! You can also read her original blog post that started all the questions.

Special Offer! For those of our clients who have special needs trusts and who are in Client Care 2009 (either you signed your trust in the last twelve months or you paid for Client Care this year), please call Linda, and we will be delighted to send you your own signed copy of the book All the Bunnies, which includes Diedre’s story about her and her brother, Nathan, who has Autism. (If you want a particular inscription in the book, please let Linda know.)

Special Needs Resources Q&A with Diedre by Disability Scoop

April 9th, 2009

Yours truly was flattered to be interviewed by Disability Scoop, the first nationally focused online news organization “serving the developmental disability community including autism, cerebral palsy, Down syndrome, fragile X and mental retardation, among others.”

This promises to be a great resource for special needs families. You can read the full interview, which covers everything from special needs trusts to conservatorships to when Supplemental Security Income is available to a person with disabilities, here.