Happy New Year!

As we ring in the new year this evening, many Americans will make their new year’s resolution to make a positive change for 2009. When we wake up in the morning, there will be at least a few significant changes to the federal estate and gift tax exclusion amounts. The estate tax exclusion amount will rise from $2,000,000 to $3,500,000. That means estates under $3,500,000 will not have to file a federal estate tax return. If your resolution is to not pass away in 2009, then you will have to wait and see what Congress does legislatively with the estate tax exclusion amount this year.

Additionally, the annual gift tax exclusion amount will rise from $12,000 to $13,000 per donee. That means that you can gift up to $13,000 ($26,000 if your married) to as many people as you want without having to report it on a gift tax return and without using any of your $1,000,000 lifetime exemption.

Happy New Year from Wrightsel & Wrightsel

It Beats Golf!

I am out of the office today, attending the second day of the Ohio State Bar Association’s Technology Conference. The Conference covers technology issues for the legal practitioner. Although the cost of the Conference rivals a couple days of golf, the return on investment is higher. Many of the topics are focused on helping the practitioner become more efficient. Yesterday’s session on controlling and organizing emails was worth the price of admission.

in⋅no⋅va⋅tion

One optimistic view of the effect of the financial crisis and our poor economy is that it will drive innovation. In a Wall Street Journal interview of Harvard Business School Professor Clayton M. Christensen, he states that “[t]he breakthrough innovations come when the tension is greatest and the resources are most limited. That’s when people are actually a lot more open to re-thinking the fundamental way they do business.”

Another Planning Tool Available in Ohio

Most people are aware that they can nominate a guardian for their minor children in the event that they are no longer available. This is typically done in a person’s will and may also appear in a separate document such as a power of attorney. Ohio law now provides that parents can also nominate a guardian for an adult incompetent child. Any parent who acts as a caregiver or otherwise assists an adult incompetent child may very well want to select a person or persons to continue in that role should that parent become unavailable.

Quote of the Day

“Our complaint alleges a stunning fraud that appears to be of epic proportions”

- Andrew M. Calamari, SEC associate director of enforcement, referring to a “Giant Ponzi Scheme” purportedly run by Bernard L. Madoff, a former chairman of the Nasdaq Stock Market. Mr. Madoff was arrested by federal agents yesterday for his alleged role in a $50 Billion Fraud (that's billion with a "B") as reported by The Wall Street Journal. The article notes that if the assertions are true, it would be five times larger than the WorldCom accounting scheme.

Timing is Everything

When markets are down, opportunities abound. People interested in reducing the size of their estates can often maximize their gifting during downturns in the market, both real estate and stock. With respect to real estate, one can gift their residence to their children, retaining the right to live in it, by use of a qualified personal residence trust (QPRT). An article by Mike Spector in The Wall Street Journal indicates that, due to the falling value of many homes, this is the ideal time to make such a gift. Another gifting strategy is available for people who have charitable inclinations. A Charitable Lead Trust (CLT) provides that a charity gets the income from the trust for a set term and then the grantor's heirs receive the remainder. A CLT funded with stock that is likely to rebound and appreciate over the long haul is ideal. If you want to skip giving anything to charity, outright gifts of such stock up to the annual exclusion amount of $12,000 is another possibility. You say you don’t like to gift? Consider selling depreciated stock at a loss to offset any capital gains or to a lesser extent ordinary income. If you fail to see the silver lining in these various strategies, you can do what many people are currently doing…wait for the market to rebound.

Social Networking: The ABA Joins the Act

Many people, attorneys and non-attorneys alike, are experimenting with social networks. Social networks are internet communities where people maintain profiles and can interact with others. I would categorize the main social networks as follows:

MySpace = strictly social,
Facebook = largely social with some potential for professional contacts,
LinkedIn = largely professional.

For most of us, the jury is still out on the value of social networks. The American Bar Association (ABA) Journal covered this topic in its recent article Social Promotion. What’s interesting is that the ABA has joined the act by releasing its LegallyMinded.com. The ABA Journal describes this network as “a combination of the best features of the top social networking sites and substantive legal data from the ABA’s deep library of information.”

New Planning Tool Available in Ohio

In the past, some people stated their burial preferences in their last will and testament. Although they were stating their intentions, that practice was ineffective. First, most funerals and the disposition of bodily remains would occur before the will was admitted to probate. Second, there was no legal authority holding that those wishes would be enforceable. Now, in Ohio, there is legal authority and practitioners and clients should be aware of this recent planning tool.

Ohio has enacted a statutory form for a person to appoint a representative to make decisions regarding the disposition of bodily remains and funeral decisions. The statute provides a prototype form.[1] The representative is, immediately upon the death of the declarant, vested with the authority to make these decisions.

Not all clients will necessarily feel that this form is necessary. These clients are comfortable that their family is familiar with their wishes and that they will follow those wishes. On the other hand, there are many situations where this form is ideal and people should be aware of its existence. Circumstances that might make this a useful tool are:
1. a second marriage with children from a prior marriage;
2. the client is unmarried and has no children;
3. the client has children who do not get along; and
4. same sex couples.

[1] See Ohio Revised Code Section 2108.72, with effective date of 10/12/2006.

Lawyers at Fault for Not Effectively Marketing the Importance of Wills?*

An article titled “Marketing Wills” is raising a mild stir among some bloggers. The article that appears in the Elder Law Journal, Volume 16, No. 1, 2008, suggests that many people die without wills because attorneys are not doing a good job of marketing them to the public. The authors, Michael McCunney and Alyssa DiRusso, propose that estate planning attorneys learn marketing basics and consult marketing experts.

This premise received a fair amount of attention on some legal blogs and at least one law firm marketing blog. The authors of these blogs disagree on the value of law firm marketing. I tend to take a more “middle of the road” view on the subject. Marketing the importance of wills might motivate some people to make an appointment with their estate planning attorney; however, for others it will fall on deaf ears. I agree with the view of the Legal Blog Watch to the extent that it states that most people are already aware of the need for a will. I disagree that the underlying reason that people do not have wills prepared is the cost. In most instances, it is not that expensive to have a will prepared.

As an estate planning attorney, I am aware of prospective clients who have mentioned the need for having a will, but have not followed through. They are aware of the importance. The cost is not prohibitive to them. It is just not high enough on their list of priorities. It may be that they do not see the urgency or it may be that they do not want to plan for their own death. It is not unusual to have a client make an estate planning appointment right before taking a long flight (overseas flights are very motivating for some reason).

* Thank you to David S. Bloomfield, Jr., Esq. for bringing this to our attention.

Quote of the Day

"You can't give what you haven't got"
- Maurice "Hank" Greenberg, former chief executive of AIG, explaining why charitable gifts from his foundation will be few and far between. Big Players Scale Back Charitable Donations, The Wall Street Journal Greenbergs family foundation's assets declined from $47.7 Million in February to about $4 Million in October.

Quote of the Day - Runner Up

"There's nobody on Capitol Hill who's been talking about rescuing the nonprofit sector."
- Paul Light, a professor at New York University's Wagner School of Public Service, speaking about the inevitable end of some U.S. charities.
Big Players Scale Back Charitable Donations, Wall Street Journal

Do It Yourself Projects Should Not Include Will Preparation

Although it may be an infrequent occurrence, some parents intentionally disinherit their children. Today’s Columbus Dispatch included a Cleveland Plain Dealer article by James F. McCarty that provided a good example. The story, Son Who Tried to Kill Parents to Get $500,000,[1] relates why Walter and Mildred Sowell decided to leave Martin, their only child, just $50 of their $500,000 collective estates. It seems that Martin, at age 17, tried to kill his parents by lacing their tea with cyanide. When Mr. Sowell spit out the tea, Martin opened fire on his parents with a .38-caliber pistol, shooting his mother three times in the back. Mr. Sowell was lucky enough that the three shots intended for him missed. All things considered, when the Sowells signed their wills two years later, the $50 bequest to Martin was generous.

Mrs. Sowell died in 2007. Mr. Sowell died in July 2008. The Sowells had reciprocal wills that left everything (other than the $50 to Martin) to the other. Their wills did not name a contingent beneficiary in the event that there was no surviving spouse. The result of not having an effective dispositive provision in the will means that the estate will pass to the closest next of kin, in this case Martin. The Chief Magistrate of the Cuyahoga County Probate Court was quoted as saying, “[i]t’s a mess, a classic example of what happens when you don’t update your will.” It is also an example of what happens when people try to prepare their own wills. Had the Sowells seen an attorney to prepare their wills, they almost certainly would have included a provision to avoid this from happening.

As an aside, the news article also recounted that, although Martin did not attend the funeral of either parent, he appeared in the Probate Court two days after his father death, seeking to be appointed fiduciary of his father’s estate.

[1] The Columbus Dispatch, November 24, 2008, Page B3.

Bye Ohio, It’s Been Nice Knowing You

While the status of the federal estate tax legislation garners much attention these days, Ohio’s current estate tax system deserves some focus. In about a month and a half, the federal estate tax exemption amount rises to $3,500,000. While that is great news for many people, Ohioans still get hit with one of the highest (if not the highest) estate taxes. Ohio’s exemption amount is just $338,333. The maximum tax rate (on estates over $500,000) is 7%. Is it any wonder that Ohioans are converting their vacation homes in Florida to permanent residences? Florida has no estate tax. Throw in the fact that Florida has no income tax and it becomes clear that it is fiscally prudent to make that move. Perhaps the best evidence of this migratory effect is that of the late Senator Howard Metzenbaum. Here is the story that The Wall Street Journal ran on Metzenbaum.

Senator Snowbird, RIP Wall Street Journal, May 3, 2008; Page A10
Former Ohio Senator Howard Metzenbaum, who died in March at age 90, was an ultraliberal as a politician but also a savvy and very rich businessman. Before going to Washington in 1976, he had made a fortune on parking lots.
As a three-term Democrat, he made his reputation in Washington by attacking big business and fighting anything that even hinted of deregulation. His attacks against Clarence Thomas in 1991 prompted a famous retort from the future Supreme Court Justice: "God is my judge, Mr. Metzenbaum, not you."
But we come today not to judge the late Senator, only to praise him for one last act of personal financial acumen. Though a lifelong Ohioan, the Senator moved to Florida in 2002, according to a declaration of domicile filed with the Broward County Clerk's office in 2003. In doing so, he avoided paying his home state's income tax (top rate: 6.55%).
More important as he neared the end of his life, the former Senator also saved his family from paying Ohio's death tax, which features one of the highest state rates (7%) and lowest asset thresholds - $338,333 - in the country. Florida famously has no income or estate tax, which is one reason other than the climate that it is home to so many northern-born retirees.Howard Metzenbaum thus denied the state in which he lived most of his life a parting financial gift. But he has at least provided the rest of us with a teaching moment in tax policy. If a liberal lion like Metzenbaum is willing to relocate late in life to avoid his state's death tax, maybe living politicians in Ohio will better understand how their confiscatory tax laws are driving its citizens to warmer climes.

Optimism Wanes Among Proponents of Estate Tax Repeal

As a result of the Congressional compromise known as the 2001 Tax Relief Act, the applicable exclusion amount (the amount exempt from federal estate tax) has been increasing and the maximum tax rate has been decreasing. The current exemption amount is $2,000,000 and will rise to $3,500,000 with dates of death on or after January 1, 2009. The $3,500,000 exemption amount is only for 2009, and in 2010 the tax is scheduled to be repealed (but only for that year). If nothing happens legislatively before the end of 2010, the Act has a Sunset Provision and we will revert back to the $1,000,000 exemption amount. No doubt the proponents of estate tax repeal felt that the repeal in 2010 should and could be made permanent. Opponents, and perhaps realists, believed that estate tax would not be repealed and that Congress would enact a more permanent exemption amount before 2010.

While the Tax Relief Act was still young, there was optimism that the estate tax would be repealed or the exemption amount raised to tax only the very wealthy, e.g., $10,000,000 and up. There is no longer serious talk of repealing the federal estate tax. The question is now when will Congress act and what will the exemption amount likely be.

When will Congress act? Congress will almost certainly be forced to address the repeal issue before the one year repeal scheduled for 2010. Based upon the lack of urgency, Congress has not addressed this issue to date, and may not until late in 2009. It has also been suggested by some people following this legislation, including Professor Jeffrey N. Pennell, that Congress could wait until 2010 with a retroactive effective date to the beginning of that year.

What will the exemption amount likely be? No one knows…yet. As stated above, no one is realistically talking repeal and the speculation is that it will be more in the $3,000,000 to $5,000,000 range. The Kiplinger Letter now forecasts that Congress will freeze the exemption amount at $3,500,000. [The Kiplinger Letter, Vol. 85, No. 45].
Another important aspect of the estate tax law is the maximum tax rate. The maximum tax rate for the federal estate tax is 45%. Much like with the exemption amount, there was optimism early on that the rate would drop significantly. The optimism is now waning, and The Kiplinger Letter now predicts that Congress will freeze the maximum tax rate at 45%.

An Extension of Time for the Charitably Inclined

As a result of our failing economy, in October of 2008, the Emergency Economic Stabilization Act of 2008, often referred to as the bailout of the U.S. financial system, was enacted. The Act does contain at least one benefit for the charitably inclined by extending the IRA Charitable Rollover through December 31, 2009.

Throughout our working lives, most of us are motivated to save by contributing to retirement accounts, because of the income tax benefits. We accumulate our savings through annual contributions to retirement accounts that are deductible or excludable from our gross income. Keep in mind that while the earnings are not currently taxed, the tax is simply deferred and not eliminated. Ultimately our distributions from these accounts will be subject to income tax. Also, these accounts will be subject to estate taxes.

What is the IRA Charitable Rollover and who qualifies? The law permits anyone 70 ½ years of age or older to transfer up to $100,000 from their retirement account outright to a charity(ies), tax-free. If one acts fast, a transfer of up to $100,000 can be made for both 2008 and 2009.

Why would anyone want to give away their nest egg? Besides the non-tax reasons, one can plan to avoid future income tax and the estate tax by rolling over a portion of their retirement account to a charity. Although the poor economy has greatly diminished the value of many people’s retirement accounts, much wealth is still accumulated in these retirement accounts. A wealthy couple with considerable assets in their IRAs now has the ability to reduce the size of these accounts and their estates by a charitable rollover. The married couple could plan to transfer up to $400,000 to charity if done before the end of 2008 ($200,000 in 2008 and $200,000 in 2009).