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).