House Votes to Extend Death Tax

The House of Representatives voted to extend the estate tax, which was set to expire in 2010 as part of the Bush-era tax cuts. The Senate still has to approve an extension, an unlikely event before December 31, given that the Senate is pre-occupied with the health care reform issue. A likely alternative is that the Senate votes to temporarily extend the estate tax until it can take up debate on a permanent extension.

As presently written, the estate tax would have expired in 2010, only to be revived in 2011 at a higher rate, 55% instead of the current 45%. The House extension maintains the maximum rate at 45% and applies only to estates over $3.5 million.

Republicans are unanimous in their support of repealing the estate tax, which, they say, hurts small businesses such as farmers and car dealerships that have substantial assets that bump the value above the exemption limit. Maintaining the estate tax burdens the transer and, therefore, the viability, of family owned businesses from one generation to the next.

Which Bankruptcy Lawyer?

Bankruptcy is one area of the law that is booming right now. If you're thinking of filing, you have dozens, if not hundreds, of options when it comes to choosing a bankruptcy attorney. Any lawyer licensed to practice law and admitted to practice before the local federal court can file a bankruptcy for you. The question is, should she?

Congress, in its infinite wisdom, requires attorneys to tell their prospective bankruptcy clients that the client doesn't need an attorney to file bankruptcy. And the bankruptcy courts have done a good job of making the forms you need available online. But that's where the government's help ends. It's up to you to figure out how to fill out a form. Is that debt secured or unsecured? Does it go on Schedule D or Schedule F? What's an executory contract or lease? Should I mark the box "reaffirm," "surrender," or "redeem"? And did you know there is a fourth option that isn't on the form?

When choosing a bankruptcy attorney, as in most things, you get what you pay for. Someone's fees might be low because he just switched from doing divorces to bankruptcies last week. Don't automatically choose the attorney with the lowest rates or the biggest Yellow Pages ad.

Estate Planning or Successon Planning?

Though often used synonomously, the terms "estate planning" and "succession planning" differ slightly. Estate planning often refers to planning for estate taxes, but can also mean planning for the distribution of your estate, that is, who gets what.

Succession planning means planning specifically for the succession of a family business to future generations. Succession planning may involve estate taxes, but they are secondary to the purpose of the planning, which is to allow a successful family business to be passed on intact to future generations. This can be very tricky because issues such as outstanding loans, employee relations and everything involved in running a business is involved in succession planning.

An estate plan might include a succession plan, or it might provide for the sale of the business.

Why Do People File Bankruptcy?

This is a question that has puzzled those who study human behavior for years. Why do some people file bankruptcy while others don't? Lots of theories have been advanced: lack of education in money matters; crushing debt from unexpected medical bills; divorce or death; or just plain irresponsible behavior in running up credit card bills. Now a nationwide study has shown at least one contributing factor: The toughness of state collection laws.

It seems that in those states where creditors have more power to collect debts, such as through garnishment of wages, foreclosure of judgment liens on real property, attachment of personal property like cars, and the like, people are more prone to file bankruptcy than debtors in states where creditors can't make their lives as miserable.

Personal Assets at Risk in Business Bankruptcies

Many entrepreneurs don't realize that their personal assets (homes, cars, savings, etc.) may be at risk if their business files bankruptcy. This is because many entrepreneurs do business as sole proprietorships, which, in the eyes of the law, is simply the individual doing business under an assumed name. When that happens, there is no business entity apart from the individual: they are one and the same. If business debts force the business to close, all of the assets of the individual are at risk to pay creditors' claims, and if the business files bankruptcy, it's really the individual who is filing, so all of his or her assets pass under the control of the bankruptcy trustee.

Incorporating or forming a limited liability company (LLC) is some protection, but not if banks and other creditors require personal guarantees from the officers, members or shareholders.

Do It Yourself Wills

I just read a blog post from a woman touting an online legal service provider, telling the world how great and easy it is to do your own will online through this company. I've previously posted about the pitfalls of do it yourself bankruptcies, but a do it yourself will is even worse. At least if you make a mistake in your bankruptcy, you have a chance to fix it. If you screw up your will, not only can't you fix it, you won't even know something is wrong.

There are a host of potential problems with a do it yourself will and estate plan. Yes, you can provide for someone to have legal custody of your children. But what about providing for them? What instructions are you going to leave and how binding will those be about whatever they inherit. For example, you do have life insurance don't you? Do you plan to leave that to the kids outright? To a 12-year old? Or are you just going to name your BFF as the beneficiary under the policy and hope she knows what you would do?

Think about it. Would you feel comfortable about buying a kit and instructions to build a car or a house from an online company and do it yourself? Doesn't your family deserve better?

Estate Planning for Blended Families

When a person remarries, either after a divorce or death of the former spouse, and children from the first marriage are involved, a whole host of estate planning problems crop up. Remarriage may not be the joyful event to the children that the marrying parent wants it to be. Questions naturally arise over who gets what. Here are some tips for making a second marriage smoother when it comes to estate planning.

First, discuss matters with your new spouse. He/she may also have children of a former marriage, which complicates the issue. Discuss your plans and hopes for your children and your new spouse's children.

Secondly, in your discussion, set some goals. Are your children minors who still need some form of support? If so, providing that support should be a major goal. If they are grown and have families of their own, what about grandchildren? Decide what you want to accomplish.

Third, consider a trust. In my view, anyone with an estate to pass to heirs should have a trust. It will allow flexibility in distributing your assets. When it comes to real estate, if the couple is older and one of the goals is to provide a place for the surviving spouse to live, consider a life estate to that spouse with the remainder passing to the trust.

Fourth, talk to your family. Don't surprise them after your death when the will is read.

Fifth, talk to a professional. Planning for blended families is one of the most complex tasks in estate planning. Don't try to do it yourself.

Credit Card and Medical Bankruptcy

I just read an online article that talks about filing a "credit card bankruptcy." Over the years I've had people ask about "medical bankruptcies" as well. There seems to be some almost universal misunderstanding that leads people to believe they can file bankruptcy against certain types of debt, such as credit cards or medical bills, but leave out other debt, like home loans, car loans, etc.

Bankruptcy is an all or nothing proposition. You either file against all debt, whether you want to or not, or you file against none. You don't get to pick and choose. It is possible to exempt certain debt from your discharge -- that's called "reaffirming" the debt. But the creditor has to be listed in the first place, which means the creditor will receive notice of the bankruptcy.

A 529 Education Savings Plan as Estate Planning Tool

A 529 education savings plan is a plan where you select the recipient ("beneficiary") and make contributions for that person's post-high school education. The beneficiary can be a child, grandchild, nephew, niece or just the neighbor's kid. You make the contributions in any amount you want. You can change the investment strategy or even the beneficiary. And those contributions can be used to reduce your overall estate for estate tax purposes.

The law currently allows a lump sum contribution of $65,000 per beneficiary, with an unlimited number of beneficiaries. That is money that won't be in your estate at the time of death, and therefore not subject to the estate tax. Remember that the current limit for estate tax is $3.5 million, but a lot of people expect the Obama Administration to push for a reduction back to the $1 million limit that existed nearly 20 years ago when Clinton was president.

There are some quirks about 529 contributions. For example, you cannot make other reportable gifts to the recipient during the five-year period after the gift, and, if you die during that five year period, a pro-rata share may come back to your estate. But it's a good way to reduce your estate.

If you're a grandparent and own the account (it is possible to set up the account in the beneficiary's name), the amount in the account is not counted when it comes to determining whether the recipient is eligible for student aid, such as grants and loans.

Will Bankruptcy Stop Foreclosure?

This is a question that is asked frequently, and the short answer is, yes, filing bankruptcy will stop foreclosure, at least temporarily. The more important questions are, for how long, and will I be able to keep my house. The answers to those questions are maybe.

If you file Chapter 7, the bankruptcy will stop foreclosure only until the creditor gets relief from the automatic stay, which is a court order saying it can continue the foreclosure process. If you have equity in the house, the trustee will likely sell the house and use the equity to pay your creditors. Either way, unless you redeem the house (pay the equity to the trustee) or work out a repayment with the bank, you will lose the house.

If you file Chapter 13, you can keep your house as long as (1) you can make all the house payments in the future; and (2) you make up the past due payments in your Chapter 13 plan. For example, let's say you file on September 5, at which time you owe six past due payments, April through September, of $1,000 each. In your plan you must pay that $6,000 back and you must make each payment of $1,000 going forward, beginning with October.

Estate Tax "Patch" Likely

The estate tax is scheduled to disappear in 2010, to be revived in 2011 at 2001 levels, which means a $1 million exemption instead of the 2009 exemption of $3.5 million, along with an increase to 55% tax from the current 45% bracket. However, recent news indicates that it is likely that Congress will extend the 2009 level through 2010, while it seeks a more permanent overhaul of the estate and gift tax code. It's almost a given that Congress will have to re-implement the estate and gift tax for 2010, because its disappearance, even for only a year, is a huge blow to tax revenue. Hopefully, though, when it is made "permanent" (whatever that means), it will not be at the low 2001 level of $1 million.

The 910-day Rule in Bankruptcy

One of the most weird rules to come out of the 2005 amendments to the Bankruptcy Code is what is known as the 910-day rule. This is a rule for confirmation of a Chapter 13 plan. Essentially it says that if a debtor purchased a motor vehicle and financed it by giving the bank title within 910 days of filing bankruptcy, the debtor must pay the debt in full. The usual method of paying a car loan is to look at what the car is worth on the filing date and pay that to the creditor. The balance becomes an unsecured claim that is paid with all other unsecured claims, such as credit cards, doctors' bills, etc., at a few cents on the dollar.

The 910-day rule is a response to what Congress perceived as abuse of the bankruptcy system by a few debtors. Some unscrupulous debtors would buy a new, expensive car for $30,000 or more and then, in a year or two, after the car had depreciated to maybe half of its original value, file bankruptcy and pay only the current value. This practice is known as lien stripping. How Congress came up with 910 days is anybody's guess, but that is the law.

401k or Roth IRA

Traditional wisdom is that you should max out your 401k before contributing to anything else. That depends on whether you believe taxes will go up or down in the future. In a 401k or traditional IRA, the contributions go in tax free (are deducted from your income) but come out and are taxed at whatever rate you are then subject to. In a Roth IRA, contributions are taxed at your normal rate, but withdrawals are tax free. The arguments for tax free contributions are (1) you're probably at a higher rate now than you will be after retirement; and (2) you'll be paying with future dollars that will likely be devalued due to inflation.

But think of this. Suppose you contribute $150,000 over your lifetime, $500 a month for 25 years. That $150,000 is deductible from your income taxes. When you retire, that $150,000 may have grown to $500,000 or more, depending on the success of your investments. Now instead of taxing only the $150,000 you contributed, Uncle Sam will collect taxes on the full $500,000. And you can't do anything about how much you withdraw, because the tax code requires certain minimum withdrawals beginning at age 70-1/2, regardless of how much you actually need.

Contributing to a 401k still makes sense in order to get your employer's match, assuming your employer still matches contributions. A match doubles your money up to the amount of the match. So be sure to contribute enough to get the full matching employer contribution. Beyond that, it might make sense to contribute the rest to a Roth IRA if you think taxes will go up in the future.

The King's Estate

Now that Michael Jackson's funeral is over, speculation is rising over what kind of estate he left and who will get it. Both questions may take years to answer.

A figure widely bandied about is that the King of Pop owed upwards of $400 million at the time of his death. Add to that estate and inheritance taxes that will likely be due, and there might not be much left for his heirs, whoever they may be. On the other hand, he supposedly had some lucrative interests in record labels that could spin off money for years to come. One thing is certain: There will be litigation that could last for years. Jimi Hendrix, who died in 1970, left an estate that was in court for 35 years.

There was an interesting post on www.taxgirl.com asking the question whether Michael Jackson's funeral expenses are deductible to his estate. Rather than answer the question outright, the Taxgirl referred readers to another estate planning blog by David Shulman, a Florida attorney www.sofloridaestateplanning.com. Mr. Shulman's answer, in a nutshell, is "maybe".

America Leads the World in Bankruptcies

In 2005, Congress revamped the Bankruptcy Code, the most significant overhaul in nearly 30 years, since the last big revision in 1979. One of the main purposes was to make filing more difficult. The number of filings dropped dramatically -- for two years. By 2007, Americans were filing at a rate nearly twice as great as that in Great Britain, the United States' closest competitor among industrialized nations.

America's public attitude toward bankruptcy, especially in this economic environment, is not as lenient as its laws, however. Most people still resent the fact that some debtors, most of whom were just plain irresponsible by taking on more debt than they could handle, get a free walk. "It isn't fair," people claim. And it isn't. But by the time people have reached the stage of bankruptcy, the time for fairness is past. Bankruptcy is a recognition that a company's or an individual's controls and ability to manage its affairs are beyond repair. Our system sets aside notions of fairness in these extreme circumstances for the benefit of all of us, by attempting to minimze the costs and maximize the potential recovery.

Don't Forget the Passwords

Every estate plan should include a list of critical information that is easily accessible in the event of death or incapacity. This list should have on it a list of bank accounts, safe deposit boxes (and the location of the keys), other financial accounts (stocks and bonds, online accounts, etc.), the location of your estate planning documents and the like. While you're making it up, don't forget to include the passwords to your online presence, be that eBay, Amazon, Yahoo, LinkedIn, Facebook, everywhere you visit in cyberspace.

Death and Taxes

To many people, estate planning is all about avoiding the estate and inheritance tax. That's why a lot of people give little thought to estate planning, because, as we've discussed, they don't consider themselves wealthy enough to have to worry about estate taxes. We discussed why estate planning is important even aside from taxes, but today we are discussing estate taxes.

There is a lifetime exemption amount for estate taxes. It's a combined estate and gift tax exemption, so to the extent that the exemption is used to give gifts tax free during life, it isn't available at death. But putting that aside, right now (2009) the estate tax exemption is $3.5 million. In 2010, the estate tax is slated to go away altogether. But Congress will probably renew it in 2011 and later, and there is talk that the exemption will be scaled back to the $1 million it was under the Clinton Administration.

Everything that you own at your death is included in your estate. This means all land (houses, rental properties, vacant land, vacation homes, etc.), bank accounts, CDs, stocks, bonds, vehicles, computers, everything down to your china and silverware. Even in today's depressed market, if you have a home, with everything else included, you could be bumping up against the $1 million mark. If that's the case, keep a close eye on the estate tax debates. And if you're up over $1 million, you definitely need to talk to an estate planning attorney.

Of course, everyone should have basic estate planning documents: will, durable power of attorney, and living will (medical directive).

Do It Yourself Bankruptcy

Congress, in its wisdom, requires lawyers to tell potential clients that they (the clients) don't need an attorney to file bankruptcy. That is true; anyone can represent him or herself in any court in the nation. Making that statement, however, doesn't answer the question SHOULD you do it yourself.

Bankruptcy is a very technical area of the law. It's not an area that attorneys dabble in. They either are in it virtually full time or they don't touch it. And these are people who went to law school and have practiced law for years. Knowing that, the question I would ask is, why would anyone try to do it themselves when what they are talking about is their financial future? In the old days (pre-BAPCPA), if a bankruptcy got dismissed, it could be refiled, usually without penalty. So if someone tried a do it yourself bankruptcy and screwed things up, they could find an attorney the next time around. Now there are serious penalties that attach to second and third filings. If you mess up the first one, there might not be a second one.

A Trust as an Estate Planning Tool

Many people think that because they are not wealthy, a trust isn't for them. In fact, a trust can be an effective estate planning tool, especially for families with younger children. A testamentary trust (see last week's post) can allow the trustee the flexibility to provide for the needs of the young children should something happen to the parents. Without a trust, any money (such as life insurance proceeds) would pass to the children. However, because they are minors, a guardianship would have to be established. The guardian's role is to preserve the money until the children reach the age of majority. This means a guardian lacks the ability to provide anything more than basic necessities. For example, if a child shows exceptional musical talent, a guardian may not be able to tap into the money to provide for private lessons. A trustee, on the other hand, given appropriate instructions and flexibility by the trustors, could do that very thing.

Don't assume that just because you aren't "wealthy" a trust isn't for you.

The Bankruptcy Means Test

One of the more devious provisions of the 2005 Bankruptcy Code amendments is the means test. This test acts as a gatekeeper for those filing bankruptcy. Meet the means test and the promised land of Chapter 7 is available. Fail the means test and you are consigned to Chapter 13. Now, don't get me wrong; Chapter 13 has its place, especially if you're about to lose your house. But for millions of people who desperately need a fresh start, Chapter 7 is the goal.

The means test looks at the ability, or means, of an individual to pay back part or all of his debt. If your means allow you to repay, you are forced into Chapter 13. On its face, that isn't so bad because those who can pay, should pay, in the opinion of most people. But the way the means test works doesn't measure ability to pay. Under the means test, the debtor (person who is going to file) averages his income for the past six months and compares that to the state median income. If his average income is below the state median, he passes the means test and can file Chapter 7. If it's above, there are a couple of other tests, but the real key is the state median compared to the last six months' average.

But here's the problem. Suppose the debtor has been out of work (a not uncommon situation right now) for the last 60 days. Right now, he has no income, but for the four months before he lost his job, he had income; maybe a good income. If that four months of income averaged over six months exceeds the state median income, this person does not qualify for Chapter 7, even though he has absolutely no income right now with which to fund a Chapter 13 plan.

Just another of the anomalies forced on us by BAPCPA.

What Types of Trusts are There?

As we discussed last week, a trust is just a way of holding and disposing of assets. I like to think of a trust as a basket to put things in. In general, there are four main types of trusts: Revocable, irrevocable, inter vivos, and testamentary. A trust is either revocable or irrevocable, and either inter vivos or testamentary, though it's possible for an inter vivos trust to be either revocable or irrevocable.

A revocable trust is one that can be revoked by the maker, usually called the trustor or settlor, at any time. An irrevocable trust is one that is permanent; it cannot be revoked once made. An inter vivos trust is a trust made during the trustor's life ("inter vivos" means "during life"). A testamentary trust, on the other hand, is one that is created by the trustor's last will and testament, and doesn't arise until after death. Because of this fact, a testamentary trust is of necessity an irrevocable trust.

A trust is a contract between the maker, the trustor, and another person, the trustee, who holds property given to him by the trustor for the benefit of third persons, called the beneficiaries. The trust agreement sets out the powers and duties of the trustee and usually specifies the conditions on which the trustee can use or give the trust property to the beneficiaries.

Should I File Bankruptcy?

A question lawyers get a lot is, "should I file bankruptcy." That's a question to which there isn't a right or wrong answer, and it's not a legal question, so most lawyers will say it's up to you. Many people feel that it is immoral to file bankruptcy and walk away from thousands of dollars of debt. That is their right to feel that way; it doesn't make filing or not filing right or wrong.

If you're confronted with debt that you find impossible to pay, for whatever reason, bankruptcy is an option to consider. Like any big financial decision, you shouldn't make it blindly. Talk to an attorney. Learn your options. Find out what a bankruptcy could do to your credit rating. Then consider the alternatives. Is there a way to dig out of the hole you are in without sacrificing too much? What about your ongoing obligation to support your family? How will filing bankruptcy (or not) affect that?

One thing you should not do is file bankruptcy for the sole purpose of being able to incur more debt, with the idea that you can always file again in eight years. In my view, such a course of action would be immoral.

What Is a Trust?

If you talk to anyone about estate planning, you're likely to hear the word "trust." What is a trust and what does it mean in estate planning?

A trust is simply a vehicle to hold assets. The reasons for creating trusts are varied, but usually including wanting to protect assets and avoid probate. Probate is the legal process by which title to assets are transferred upon the owner's death. By putting the assets into a trust during your lifetime, you can avoid probate.

However, merely creating a trust isn't enough. You still have to fund the trust, which means putting title to the assets in the name of the trust. Too often people create a trust but never fund it. In that case, the trust is like an empty basket. It would be more useful if there was something in the basket.

Whether or not a trust is right for you, and, if so, what kind, are questions best asked of a competent estate planning attorney.

Bad Lawyer

An Illinois lawyer appealed a trial court's award of $80,000 in legal fees against him for vexatious claims he brought against defendants on behalf of his clients. The lawyer claimed that the court shouldn't award fees because he had no assets and didn't earn very much because he really wasn't a good lawyer and people weren't willing to pay for his services. The Illinois appeals court rejected his claim, saying that if he really couldn't earn a living as a lawyer, maybe it was time to find another profession.

Tax Refunds in Bankruptcy

The question often arises about tax refunds when someone files bankruptcy. It usually arises in a Chapter 7, known as a liquidation. The rule is, if you are entitled to a tax refund at the time of filing, it belongs to your estate, which means the bankruptcy trustee might take it to pay creditors. So if you are filing before you get a refund, you should talk to your attorney about possibly delaying until you get the refund and have a chance to convert it to exempt assets. There is nothing illegal about converting cash (the refund) into an asset that is exempt from the trustee, such as buying food storage, or a new freezer. Your attorney can advise you what is best.

Even if you file after getting a refund, some trustees are now keeping your case open to see what kind of a refund you get next year (for the year in which you filed). Then they might claim a portion of it, based on what time of year you filed. For example, suppose you file on July 1, half way through 2009. When you file your 2009 taxes in 2010, the trustee might claim to be entitled to one half of that refund. Again, consult with your attorney.

Sorting Through the Mess

A well executed estate plan is very little help if key documents can't be found. The most important are the will and any trusts that may have been executed. But besides these obvious documents, financial records are just as important. The executor of your estate or the trustees under the trust need to know what they are being called on to administer.

While most people don't want to think about dying, and few people sit around thinking of what a mess those left behind might have to deal with, the fact is that besides your estate plan, you should leave detailed instructions about what assets you owned. The simplest way to deal with this is to keep a loose leaf notebook that is current in terms of what you own (real property, bank accounts, stocks, vehicles, etc.) and where it is located. Then make sure those who will deal with your estate know where to find the notebook.

New Laws

318 new laws went into effect on Tuesday, May 12. That's 60 days after the legislature adjourned and that is the usualy time period for new laws to take effect. Some of the more interesting are:

• Marriage license fees went up $10
• It is now illegal in Utah to text while driving. Talking on a cell phone is still legal.
• An adult may be guilty of harboring a runaway if he/she gives shelter to a minor. So if your son's or daughter's friend starts living with you, you might be guilty.
• It is now legal to brew up to 100 gallons of beer or wine every year in your own house.

Keeping Your House in Bankruptcy

If you file a Chapter 7 bankruptcy, you might be able to keep your house. If there is substantial equity in the house (value above the mortgages and other liens) the trustee might force a sale to get money to pay creditors. But most states have a homestead exemption of some type. In Utah, it is $20,000; $40,000 for a married couple. In today's market, that plus the mortgages probably means there is no equity for the trustee and he will abandon the house. Then the issue is between you and the bank. If you're current on your payments, all you have to do is keep making the payments. If you're not current, you will need to negotiate a reaffirmation agreement with the bank, which means you and the bank agree on how you will get current. In some cases, the bank might be willing to reduce the interest rate to avoid having to foreclose on the house.

By the Numbers

According to a 2007 survey of adult residents of the U.S. found that 55% don't have a will. Fifty-two percent of Anglos have wills, compared to only 32% of blacks and 26% of Hispanics. Forty-one percent of people have living wills, up from 31% in 2004, and 38% have designated someone as a health care attorney-in-fact, up from 27% in 2004. Ten percent of the people surveyed say they don't have a will because it's too depressing to think about. Another 9% say they don't know who to talk to, and 24% say they don't have enough assets to warrant estate planning.

Source: www.lawyers.com.

Stocks Worthless in Bankruptcy

With all the talk about GM, Chrysler and other huge American icons filing bankruptcy, the question arises, what happens to my stock in these companies if they file? The answer, in most cases, is the stock becomes worthless. Stockholders are owners of the company. As such, they come last when a company is liquidated. Creditors get paid before owners, and only if anything is left after all the creditors are paid in full do owners get as much as a penny. Even if the company goes through reorganization, which is what many airlines did and GM and Chrysler are expected to do, very often the shareholders get almost nothing for their shares.

High Stakes Estate Planning

Most of the time estate planning is boring and dull. But occasionally there is high drama. Take the case of Brooke Astor, matriarch of New York's high society and heir to the Astor name. Before she died at age 105 in 2007, Mrs. Astor changed her will to benefit her son, Anthony Marshall and her attorney, Francis X. Morrisey. Prosecutors in New York claim that Marshall and Morrisey exploited Mrs. Astor's Alzheimer's disease and induced her to sign amendments, known as codicils, to her will in the years before her death. They plan to paint a picture of a declining elderly women gradually losing touch with reality, through witnesses such as housekeepers and friends, among whom is expected to be Annette de la Renta, wife of fashion magnate Oscar de la Renta. The trial is expected to last two months.

However, the defendants claim that Mrs. Astor was not at all incompetent when she changed her will, and proving her incompetence may well be a difficult task. Alzheimer's patients often have moments of lucidity, and the prosecution will have to prove that Mrs. Astor was not in one of those moments at the exact instant that she signed her codicils.

Mrs. Astor's son, Anthony Marshall, is her only child. His father was Mrs. Astor's first husband. Her third husband, Vincent Astor, was the son of John Jacob Astor IV, who made his fortune in real estate and died in the sinking of the Titanic.

Bankruptcy Reform

We've only had the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) for three and one-half years, since fall, 2005, and already Congress is starting to think about tinkering with it. As well they should. It should never have been enacted in the first place.

BAPCPA (fondly known as Bappa-Crappa) took nearly eight years to become law. Beginning in 1996, when bankruptcy filings took off, credit card companies moaned to Congress that too many people were filing bankruptcy willy-nilly, discharging billions of dollars of debt owed to those companies. Never mind that those same companies inundate people with three, four, five or more offers for pre-approved credit cards every week. They (the credit card companies) whined that something had to be done, that bankruptcy was out of control. After being derailed by President Clinton's impeachment, George Bush's election, 9-11, the dotcom bust and a few other items, in 2005, bankruptcy reform came at last. The economy was saved.

It took about three years, until the mortgage meltdown in 2008, for Congress to start looking at the billions of dollars the credit card companies were earning, and decide that maybe something needed to be done about "excess profits". Then everyone jumped on the bankruptcy reform bandwagon. Now the mortgage lenders are the bad guys and bankruptcy needs to be reformed yet again to let borrowers modify their mortgage loans. It seems Congress will never learn. Before Bappa-Crappa was enacted, dozens of law and economics professors signed a petition urging Congress not to play with the Bankruptcy Code. After three-plus years, the almost unanimous consensus is, Bappa-Crappa has lived up to its nickname. It is a poorly drafted law that is draconian in its scope.

The pendulum swung too far in favor of creditors and now, less than four years later, we are looking at another overhaul. Once again, many are urging Congress not to allow modification of mortgages in bankruptcy because of the damage it might do to the already fragile mortgage market. Will Congress listen this time?

Obama's Budget Proposal

We got a first look at President Obama's proposed budget this past weekend. There are good and bad things in it. And a couple of really bad things.

An earlier post questioned what would happen with the estate tax, assuming it was retained and didn't expire as the Bush Administration had proposed. As expected, the Obama Administration intends to keep the estate tax. But there is a silver lining: the exclusion will remain at $3.5 million instead of reverting to $1 million as it was under President Clinton. Small business owners wanted a complete repeal, but the $3.5 million exclusion should ease some of their pain.

Also a good point is an annual adjustment to keep the Alternative Minimum Tax (AMT) from biting more people whose incomes have crept up due to cost of living increases. That's a good thing.

Tax rates in general will increase. The highest marginal rate is increasing from 35% to 39.6%. That's bad. And along with that is the ultimate "marriage penalty". These higher rates kick in at $200,000 for an individual, but $250,000 for a married couple.

Some really bad news and a surprise is the proposal to limit deductions at 28%. What this means is if you are in the higher tax brackets, a $1,000 charitable contribution, for example, is only worth $280 (28%) instead of the $396 (39.6%) of your tax bracket. This comes as a surprise and attacks a very sacred cow, that of the deductibility of mortgage interest. For years tax policy has encouraged home ownership by allowing a deduction for mortgage interest. Now that and all deductions would be limited.

It's important to remember that these are all just proposals. The President's budget has to be approved by Congress and there could be a fight to get it through.

Bankruptcy Law Changes

There's a sense of inevitability that Congress will amend the Bankruptcy Code to allow judges to modify home mortgages. Currently, in a Chapter 13, all a debtor can do is catch up on his or her back payments. In the meantime, he has to keep his ongoing payments current. Under proposals in both theHouse and Senate, Chapter 13 would be amended to permit a judge to write down the amount of a loan to the value of the house, if the house is now worth less than what's owed on it. This is a process called "cram down", from the phrase "cram it down the throat of the creditor", that is, force the creditor (who usually objects) to accept the lower value.

There's a good deal of debate about the wisdom of such a proposal. Those opposed say it will raise the lending costs to everyone. Banks will never be sure that they will get paid in full or that they won't have a lower value crammed down on them. As a result, they will raise lending rates to everyone to spread the risk of the relatively few bankruptcies over all borrowers. Thus, we'll all end up paying for those people who can't pay for themselves. But that's what we're all doing with the bailout anyway. Those people who were responsible are going to pay for the $835 billion in new assistance that was just signed into law by President Obama.

Bankruptcy

Today it's time for a change in topics. With the economy the way it is, bankruptcies are soaring in the United States. So we'll look at the different types of bankruptcy relief.

There are two types of bankruptcies avaialbe for individuals. The first is Chapter 7. This is also called a straight bankruptcy. In a Chapter 7, a trustee is appointed to take over all of the person's assets, sell them, and use the money to pay creditors. In reality, most Chapter 7s are what are called "no asset" cases, meaning there are no unencumbered assets for the trustee to sell. The trustee won't sell a house, for example, if it is worth less than the mortgage that is owed. Before a trustee can take any of the money he gets from selling assets, he first has to pay any secured creditors, those creditors, such as banks that hold mortgages, or credit unions that hold the title to a car, who have taken a pledge of property from the borrower. Only after secured creditors are paid can the trustee use any excess funds to pay other creditors. In most Chapter 7s, the trustee concludes that he can't get any funds to pay creditors other than those secured by the property, so he abandons the property and doesn't sell it.

In a Chapter 13, also called a wage earner plan, the debtor (person filing bankruptcy) pays his or her disposable income (that portion of income left after paying housing costs such as rent, food, utilities and other normal living expenses) to the Chapter 13 trustee, who then doles the money out to the creditors. A Chapter 13 plan goes on for as long as five years. At the end, the debtor gets a discharge from any debts that haven't been paid through the Chapter 13 (with some exceptions).

What's Happening with 401(k)s?

Starbucks has announced that it is no longer matching employee contributions to their 401k plan. Fed Ex and Motorola have said they'll do the same. Smaller companies have or will follow suit. The reason, of course, is the economy. Employers are no different from individuals; in lean times they have to cut costs and cutting contributions to the 401(k) retirement plan is an easy call.

So what should you do? For starters, you SHOULD be contributing to a 401(k). If your employer is matching, contribute at least up to what the employer will match. You're doubling your money instantly. If you don't have a 401(k), shame on you. Start NOW. True, the market is down and the value of your 401(k) is also down, but unless you expect the end of the world, the market will rebound eventually. It always has. Contributions now mean you're buying cheap stock.

Secondly, watch how your employer matches your contribution. Remember Enron? Enron matched employees' contributions with Enron stock. When Enron tanked and the stock became worthless, so did thousands of 401(k) accounts. Diversify your investments. Most 401(k) sponsors have a menu of different investment options that mix what your contributions purchase based on your tolerance for risk. A simple 10-minute quiz created by the sponsor often points you to the right option.

Finally, watch out for vesting. At some employers, you must be employed a certain time, a year, five years, before their matching contributions "vest" (in other words, before you become entitled to them).

Estate Tax to Continue

President-elect Barack Obama announced recently that he intends to continue the estate tax (dubbed the "Death Tax" by opponents) instead of letting it expire in 2010 as originally planned by the new Bush administration in 2001. Under the current provisions of the estate tax, estates over $3.5 million are taxed at 45%. Estates under $3.5 million ($7 million for married couples) are exempt from the tax. However, there is no guarantee the Obama administration will maintain the estate tax at this level. During President Clinton's administration, estates over $1 million were taxed at a 55% rate; President Bush increased the exemption gradually, with a proposed phase out completely next year.

The estate tax has been criticized as restricting a business owner's ability to pass on the fruits of a lifetime. The most common example given is of a family farmer who is "land rich and cash poor". Imposing a 45% tax on the value of the farm likely means the farm will have to be sold to pay Uncle Sam.

While most people will not have to worry about the estate tax in their estate planning, everyone should be aware of its existence and now of its permanence.