What Happens When a Bond Holder Dies?

I just came across this useful web site by the US Treasury Department, so I thought I'd pass along the information: US Treasury- Death of a Bond Holder

The important thing that you should know is as follows:

• If only one person is named on a savings bond, and that person is deceased, the bond becomes the property of their estate.
• If both people named on a bond are deceased, the bond is the property of the estate of the person who died last.
• If one of two people named on a bond is deceased, the surviving person is automatically the owner as if that survivor had been the sole owner from the time the bond was issued.

United Kingdom Inheritance Tax Update

The United Kingdom currently imposes an inheritance tax on assets in excess of £300,000 (slightly less than $500,000 based upon today's currency rates) when a person dies. The governing party, the Tories, had vowed to increase that threshold to £1,000,000. However, according to The Telegraph, due to the worldwide financial slowdown and mounting debt, it appears that they will not be able to keep that promise.

Thanks to the Wills, Trusts & Estates Prof Blog for bringing this to my attention.

New Jersey Tax Amnesty 2009

For those of you who may have had trouble with the NJ taxman, there is some relief. New Jersey is offering "Amnesty" of sorts to those who still owe money. The benefit is that the government is willing to waive penalties, some interest and collection costs in an effort to get the money now. You will obviously still owe the base amount of the tax and some interest.

If you have the money (or credit on your credit card) and you agree you owe the taxes, this is certainly a good time to settle up. If you do not agree or do not have the money to pay now, you must still try and explore your other legal options.

For more information about the "Amnesty", you should go to: taxamnesty.nj.gov

It's Looking More and More Like We Will Keep the $3.5 Million Estate Tax Exemption

With all the talks about the Democrats negotiating a budget in a way to avoid a filibuster on health care, one should not overlook the fact that the budget includes an extension of the current Federal Estate Tax Exemption. Under current law, there is an federal estate tax exemption of $3.5 Million this year, there is no estate tax in 2010 and the estate tax is scheduled to return with only a $1 Million exemption (indexed for inflation) in 2011.

With the budget deficits mounting, there is no practical way the government will give up that revenue and everyone involved despises the uncertainty of the law. So, the extension of the $3.5 exemption will provide certainty to both estate planners and the number crunchers in D.C. It should be noted that it appears the 45% tax on estates over the $3.5 Million threshold will remain intact also.

Who has an Estate and Gift Tax Treaty with the US?

I just noticed a helpful link at the IRS that gives a nice chart detailing which countries have an Estate and Gift Tax Treaty with the US: Estate and Gift Tax Treaties.

Change to New York Power of Attorney Form

On January 27th of this year, New York changed its law regarding the requirements necessary to have a valid financial power of attorney. Some the more important changes include:

1. Two people must now witness the Grantor's signature;
2. The agent must now sign the power of attorney and have his/her signature notarized;
3. If you want your agent to make gifts for tax planning (or any other purpose), you must execute a Major Gift Rider; and
4. You may now have an independent person act as a monitor for the agent.

These changes become effective September 1, 2009. (NOTE - Original bill noted an effective date of March 1.)

Thanks to the Wills, Trusts & Estates Professor Blog for bringing this to my attention. Thanks to Frank Farkas of the Jewish Association for the Aged for bringing the change of the effective date to my attention.

Perfect Time to do Estate Planning for that Vacation Home

Sometimes in a bad economy, opportunities present themselves. One great planning opportunity that currently makes a lot of sense is a special trust known as a QPRT (Qualified Personal Residence Trust). A QPRT is great way to pass on wealth to your heirs in a tax efficient manner and without affecting your more liquid assets.

Here's generally how it works:
1) The owner of a property places a personal residence (or vacation home) in trust. The owner can continue to live in and use the property for a set number of years. At the end of the term, the property goes to whomever the owner wants, typically the owner's child or into another trust for the benefit of the child.
2) This gift is a legally enforceable promise to make a gift of the property to the child in X years from now. So, if the house is worth $500,000, and you promise to give it to your daughter 7 years from now, it is not really a $500,000 gift due to the time/value of money. The actual amount of the gift depends upon a variety of factors including the age of the donor and the current interest rate.
3) This plan can produce large estate tax savings. Giving away property while you are alive is an estate planning tax strategy known as an estate freeze. You are giving away property now so that future growth occurs in the estate of your heirs, rather than in your own estate. A QPRT leverages this strategy so that you are combining a discounted gift with an estate freeze.

• Assume the following hypothetical. A wealthy 70 year old woman (worth $3,500,000) lives in New Jersey and has one adult son. She owns a shore home worth $1,000,000. Now, upon this woman's death, in New Jersey, she may bequeath $675,000 before having a NJ estate tax. Under current federal law, she can bequeath $3,500,000 before she has a federal estate tax. There is no limit to what she may gift away during life according to NJ, but the federal limit is $1,000,000. After that, there is a federal gift tax.
  
• This woman decides to give away her shore home, worth $1,000,000, to her daughter. She structures the transaction so that the term of the QPRT is 7 years. This results in a taxable gift for federal gift tax purposes of $657,300 based upon the woman's age, the term of the trust and the March 2009 Section 7520 rate. There is no NJ gift tax.
  
• Now, let's fast forward 7 years and 1 day, when the woman passes. I will assume the value of the shore property increased to about $1,300,000 and the rest of her estate only modestly increased from $2.5 Million to $2,700,000. If she had not given anything away, then at the time of her death her estate would have equaled $4,000,000. Assuming that the federal estate tax exemption remains at $3,500,000 and the New Jersey Estate tax exemption remains at $675,000, then her estate would have a combined estate tax liability of approximately $505,400 ($225,000 federal and $280,400 New Jersey). By making this gift via a QPRT, we completely elimiate the federal estate tax and the New Jersey estate tax would be reduced to approximately $155,600 - a savings of $349,800. (To compare with an outright gift of property, the combined estate tax would be $245,600, a savings of only $259,800.)
  

Traps to be wary of:
1) Be careful about giving away highly appreciated real estate unless you are quite sure the donees plan to keep it in the family for a long time. This is because the donees receive the gift with a carryover basis and could be subject to a very large capital gains tax upon the sale of the property.
2) Do not use this technique if the donor is in poor health. Setting up a QPRT is most effective when the donor survives the term of the trust. If the donor does not survive, then the property is included in his gross estate for both federal and state estate tax purposes.
3) For the same reason as Trap #2, it is best not to set up too long of a term. The longer the term, the greater the risk that the donor will pass. In my opinion, a term longer than 10 years usually produces a risk that outweighs the benefits of obtaining a discount on the gift. This is especially true now that the federal estate tax exemption has increased.
4) If the donor is married, it is usually best to set up two QPRTs, with the wife giving away her half in one QPRT and the husband giving away his half in the other. This technique increases the chance that at least one person will survive the term.
5) This technique works even better when there is a high interest rate, so if the owner has an estate subject to the federal estate tax, the best time to do a QPRT is when the value of the property value is low, but the AFR (applicable federal rate) is high.

In conclusion, this is still a great time to do gift planning, but you should consider doing so with assets that are not as liquid.

Note: QPRT calculations done courtesy of Adam Epstein at Bernstein Wealth Management.