Death and Taxes...It's a Good Year to Die

"Anyone may arrange his affairs so that his taxes shall be as low as
possible; he is not bound to choose that pattern which best pays the
treasury. There is not even a patriotic duty to increase one's taxes.
Over and over again the Courts have said that there is nothing sinister
in so arranging affairs as to keep taxes as low as possible. Everyone
does it, rich and poor alike and all do right, for nobody owes any
public duty to pay more than the law demands."
-Judge Learned Hand

As you may have heard, due to legislative gridlock, there is no estate tax in 2010. However, the estate tax is back with a vengeance in 2011. Unless Congress changes things, the estate tax will be at a rate of 55% for all estates above $1 million. Most folks who hear about this are probably thinking to themselves, “Surely you don’t mean that if I leave my family 11 million dollars, the government gets $5.5 million of it?” No, I don’t mean that (and stop calling me “Shirley”).

The Feds only get a hold of $5.5 million if you manage to pass all your wealth through your estate. So don’t feel bad if you didn’t die in 2010, you can leave amounts to loved ones through non-probate transfers (meaning these amounts aren’t part of your “estate” for estate tax purposes).

For example, one way to keep money out of your estate is the annual gift tax exclusion. You can give $13,000 per person, per year ($26,000 if you combine your spouse’s exclusion) without having to pay a gift tax. This is one way you can avoid the estate tax without even having to die (most people prefer this).

People like to talk about how high taxes used to be. For instance in the 1950’s the highest marginal income tax rate was above 90%. However, what they don’t say is that very few people paid this tax rate (thanks to numerous loopholes under the tax code). The same is true for the estate tax. With careful planning (and some good advice) the estate tax can be avoided. Like Judge Learned Hand said it isn’t your patriotic duty to pay the Feds. any more than required.

Charitable Remainder Trusts: Income for Life and a Good Deed at Death

Many people like the idea of leaving bequests to favorite charities in their wills. But instead of leaving money to a charity in your will, you can put that money into a charitable remainder trust and collect income while you are still alive. Charitable remainder trusts have many other advantages, including reducing your income and estate taxes and diversifying your assets.

A charitable remainder trust is an irrevocable trust that provides you (and possibly your spouse) with income for life. You place assets into the trust and during your lifetime you receive a set percentage from the trust. When you die, the remainder in the trust goes to the charity (or charities) of your choice

A charitable remainder trust has many benefits:

•At the time you create the trust, you will receive an income tax deduction for charitable giving.

•Any profit from the sale of investments within the trust are not subject to capital gains tax, which means the trustee may have more freedom in managing the assets.

•When you die, the assets in the trust will pass outside your estate and be eligible for the estate tax charitable deduction.

The downside of a charitable remainder trust is that it is irrevocable, meaning once you create the trust, you can't cancel it. While you can't revoke the trust, you may have the ability to change the beneficiary if you decide to give to a different charity. You may also serve as trustee, giving you control over how the trust assets are invested. In addition, note that any income you receive from the trust will be subject to income taxes.

To find out if a charitable remainder trust is right for you, talk to a qualified estate planning or elder law attorney.

Prenuptial Agreement –Another Business Decision

Raising the prospect of a pre-nup with a future spouse may not be seen as a romantic overture. While money can’t buy you love, a bad relationship can get you to the “Big D.”

The reality is that an estimated 50% of all marriages end in divorce. DivorceRate.org states that when individuals enter marriage a second or third time, the likelihood of repeating the whole process of divorce increases to 67%, and on to 74%. These staggering statics are a valid reason for concern, especially for business people and entrepreneurs in community property and common law states, such as Texas.

Entering into a pre-nup while a couple is on amicable terms allows the couple to make decisions that are in their best interest, without emotions taking control. It is infinitely simple for business lawyers to craft a pre-nup and determine a liquidation of the business interest without the baggage of a divorce proceeding. And a pre-nup is a planning tool, a prudent business owner must examine prior to entering into a new marital relationship.

Where is the Romance?

Part of any business planning strategy involves planning for contingencies. For business people looking at entry into a marital relationship, after their business becomes profitable, premarital or prenuptial agreements are essential tools to protect the business.

A well structured pre-nup could potentially lessen the costly and lengthy legal process that a divorce can bring upon an individual. It allows business lawyers to work with family law attorneys and structure either an agreed liquidated amount for non business owning spouses community property interest in the business, if any, or the method by which that spouse’s interest would be preserved by the business owner.

Elyse M. Farrow

The Vethan Law Firm, P.C.