Review Your Estate Planning Documents

In the last estate planning post, I noted that Congress had failed to extend the estate tax, and this was creating all sorts of uncertainty for planners in 2010. The uncertainty doesn't end with what might be done in the future. The repeal of the estate tax could throw a monkey wrench into existing estate plans.

This is because many plans were writtent to take advantage of the spousal exemption. Under the Internal Revenue Code, a certain amount of the estate was exempt if passed to a surviving spouse. As a result, many estate plans provided for a division of the estate, with a portion equal to the spouse's exemption going to the spouse, the rest going into a trust or somewhere else. With the repeal of the estate tax, these plans could be read such that the surviving spouse gets nothing, i.e., since there is no estate tax, there is no spousal exemption. Thus, everything goes into the trust or elsewhere, where the spouse can't get at it. This is clearly not what most people would want for a surviving spouse, but it might be exactly what happens.

Review your estate planning documents.

The Best Time to File Bankruptcy

Since the passage of the Bankruptcy Abuse and Consumer Protection Act in 2005, timing a bankruptcy filing has become more important than ever. First is the means test, which we have discussed previously. The means test looks at a debtor's income over the past six months, so if you received a big bonus in the past six months, you might want to wait a month or two so that bonus isn't included in the calculation of average income. Secondly, if you're facing foreclosure or having wages garnished, you probably want to file as soon as possible, like yesterday. Thirdly, if you have some cash on hand or other assets that are subject to being taken by the bankruptcy trustee, you may want to delay filing while you engage in some exemption planning. There is nothing wrong with using non-exempt assets (such as cash or selling stocks) to acquire exempt assets (such as clothes, food, a new washer/dryer or refrigerator). All of these considerations have to be weighed to determine when is the best time for you to file.

Death and Taxes

Nothing is certain but death and taxes, goes the old saying. But combine the two and nothing is certain but uncertainty. The new year came without Congress extending the estate tax (the House voted to extend the tax, but the Senate didn't act), so for 2010 it is gone. It's scheduled to revive at a higher rate (55% vs. 45% in 2009) and lower exemption ($1 million vs. $3.5 million in 2009). Most commentators expected Congress to extend the tax in 2010. Most commentators were wrong.

2010 marks the first year since 1916 that a person can die without an estate tax. That is making for a lot of macabre jokes about doing in a rich relative. The truth, though, is 2010 might not be such a great year to die anyway. In the Internal Revenue Code there is a provision for "stepped up basis," which means that when property passed by inheritance, the basis (amount at which the property was acquired) was stepped up to the date of death. That meant, for example, if Uncle Harry owned real estate that he purchased in 1950 for $10,000 and it is today worth $750,000, the basis to the heirs became $750,000, saving a bundle in capital gains taxes. But this provision went away with the estate tax. So now the heirs are looking at a capital gain tax on $740,000, the difference between the 1950 basis of $10,000, and today's value of $750,000 should they sell. Assuming values continue upward, that taxable gain will only get bigger.

What is the Meeting of Creditors?

The meeting of creditors, also called a 341 meeting, because it is held pursuant to section 341 of the Bankruptcy Code, is often the only appearance that a debtor makes in his bankruptcy. The meeting is conducted by the bankruptcy trustee appointed to the case, not the bankruptcy judge. The purpose of the meeting is for the trustee to question the debtor under oath about the debtor's schedules and statement of affairs, and to allow creditors to question the debtor. In most cases, creditors don't appear at the meeting. This is because their appearance is useless in most cases, especially where the debt is unsecured. Occasionally a secured creditor will appear and ask about insurance, condition of the collateral or what the debtor intends to do (surrender, redeem or reaffirm the debt). In Utah, trustees hold meetings every hour with 10-12 debtors appearing each hour. This means the trustees allocate 5-6 minutes per case.