February 2013 Archives

Reflections on the tax law changes: income taxes favor investment.

February 28, 2013, by

arm wrestling 2.jpg
Lars is a tax guy. This has been a good skill for him. He likes it, kind of a math-like career foundation that makes him useful, earns him a good living, and has forced him (he recognizes) to develop people skills in order for things to go well. He's gotten more interested in estate planning and estate taxes in recent years, but income taxes have been his bread and butter for most of his career.

What Congress did at the beginning of January is an interesting combination of income taxes and estate planning stuff. It's mostly good for those who are wealthy or want to get there. There is still a favorable tax rate for capital gains (generally a maximum of 20%, compared with 39.6% on ordinary income), and the lower rate was also maintained for qualifying dividends. Of course there is policy justification for taxing dividends at lower rates; theoretically at least the corporation's income has already been taxed. But it's still a good deal for those who have stocks, like Lars. His portfolio will grow a little faster over time as a result.

Continue reading "Reflections on the tax law changes: income taxes favor investment. " »

Reflections on the tax law changes: bypass trusts still useful.

February 21, 2013, by

future husband.jpg
Our friend Lars and his wife Kyra have a Living Trust with a bypass trust arrangement. This means that the share of the first spouse to die, is to be held in trust for the lifetime benefit of the surviving spouse. One of the benefits of this trust is that it would preserve the estate tax exemption of the first estate. There is a new conventional wisdom that bypass trusts aren't needed now that we have portability, by which the surviving spouse inherits the unused portion of the deceased spouse's exemption whether there is a trust or not.

Lars isn't buying this new thinking. If his estate goes outright to Kyra, she inherits his now $5,250,000 unused exemption to add to her own, but can lose it if she remarries. So a possible result is preserving no exemption of the first estate. If instead a $5,250,000 trust is established and grows in value to $10,000,000 during the surviving spouse's lifetime, the first estate gets that much exemption.

Continue reading "Reflections on the tax law changes: bypass trusts still useful. " »

Reflections on the tax law changes: state estate taxes more important.

February 14, 2013, by

rocky beach.jpg

Our CPA friend Lars is on one of his crunchy early Sunday walks on the rocky beach. It's light by 7 now. Kyra is sleeping in. Lars can't, or at least would rather walk and think.

CPAs do more income tax work than estate work, but as he and his clients have matured and become more wealthy, he's taken a special interest in gift and estate taxes, and other aspects of estate planning. This morning he's trying to psych out the meaning of the recent Federal tax law changes for him and his practice.

One thing that has happened, at least in Lars's State of Washington, is that state estate taxes have become more important. The main reason is pretty obvious: the State exemption (in Washington) is $2 million per estate; the Federal is now $5,250,000. For a married couple those numbers are doubled, if there is proper planning. At these levels, Lars's rich Uncle Nils still has to worry about the Federal estate tax, but he's in a small minority. Lars and many of his clients fall between $4 million and $10 million, where only the State estate tax is a concern.

Continue reading "Reflections on the tax law changes: state estate taxes more important. " »

Premarital Agreements (cont'd): Ken gambles early and Donna late; who wins?

February 7, 2013, by

dice eleven.jpg

In Kellar v. Estate of Kellar, the Washington Court of Appeals worked its way through preliminary arguments, to arrive at the point of deciding on the validity of Ken and Donna's premarital agreement. It turned out rich guy Ken got lucky, or more accurately his kids did since the issue was being raised in his estate.

A premarital agreement is valid under Washington law if it is either made with proper procedure, or economically fair. To meet the procedural test there must be full disclosure of finances, an absence of coercion, and independent legal advice for each party. Donna argued in vain on each of these points.

Because Donna was prevented by the dead man's statute from testifying on what Ken had said (see last week's blog), there was little evidence on the amount of financial disclosure. The Court thought it significant that the paragraph of the agreement acknowledging full disclosure was separately initialed by the parties. That seems a little skinny, but the Court let Ken's estate get by on this issue.

Donna also argued that they had been hurried through the process of making the agreement, and so she had felt coerced into it. Successful marriage proposal in early September 2001, agreement made on the 14th, and marriage on the 19th. That does seem rushed, but Ken's estate prevailed on this issue also. It helped that there had been some negotiation. The Court wrote "There is nothing inherently fatal about signing a prenuptial agreement five days before the wedding." Ken's heirs were fortunate; most attorneys advising clients on premarital agreements would be uncomfortable with that kind of timing.

Continue reading "Premarital Agreements (cont'd): Ken gambles early and Donna late; who wins? " »