2010 is nearly half over and Congress still hasn't done anything about the estate tax. It expired on December 31, 2009, leaving the United States without an estate tax for the first time since 1916. It's scheduled to be resurrected in 2011 at levels unseen since the Clinton administration.
For now, someone like Dan Duncan, who died earlier this year leaving an estate worth an estimated $9 billion, can pass his estate free of any tax to his heirs. Had Mr. Duncan died in 2009, the estate would have been taxed at 45%, meaning just over $4 billion would have gone to the IRS. Had he survived until next year, when the estate tax is scheduled to come back at 55%, his heirs would have lost nearly $5 billion.
But the real losers in the estate tax mess are the merely rich, those with estates between $1 million and $3.5 million. In 2009, the estate tax exemption was $3.5 million, meaning estates under that amount didn't pay any tax. In 2011 the exemption will drop to $1 million and the 55% rate will kick in. Many of those people have set up their estate plans under 2009 rules on the assumption they would owe no tax. If they don't act quickly, they could end up losing a bundle.
Tuesday, June 15, 2010
Thursday, June 10, 2010
Help! I don't qualify for Chapter 7 OR Chapter 13
More people are being caught between the rock of the means test under Chapter 7 and the hard place of the debt limitations under Chapter 13, finding that they can't qualify for either.
The means test under Chapter 7 says, basically, if you make above a certain income (the state median income for a family of your size), you can't file Chapter 7. There are exceptions and other tests, but the bulk of Chapter 7s are filed by people who "pass the means test" by having income under the state median, or whose debts are not primarily consumer debts, in which case the means test doesn't apply. The means test was designed to force more people into Chapter 13 so they repaid at least some of their debt.
Less known are the debt limitations of Chapter 13. Under section 109 of the Bankruptcy Code, if a debtor (and spouse, if filing jointly) owes more than $360,475 in unsecured debt, or more than $1,081,400 in secured debt, they do not qualify for Chapter 13. What this means is that for a high debt, high income debtor, she cannot file for either Chapter 7 or Chapter 13.
Consider a debtor earning $100,000/year, single, who bought a house in 2007, at the height of the real estate market. In today's market that house is worth $400,000 and she owes $750,000. Since the house is only worth $400,000, $350,000 of that debt is unsecured. If she has in excess of $10,475 in other unsecured debt, such as credit cards, doctor bills, student loans, etc. this person doesn't qualify for Chapter 13. But due to her income, she can't file Chapter 7, either (and she might not want to for various reasons). Her only option is to file a consumer Chapter 11, a very expensive and time consuming proposition.
The means test under Chapter 7 says, basically, if you make above a certain income (the state median income for a family of your size), you can't file Chapter 7. There are exceptions and other tests, but the bulk of Chapter 7s are filed by people who "pass the means test" by having income under the state median, or whose debts are not primarily consumer debts, in which case the means test doesn't apply. The means test was designed to force more people into Chapter 13 so they repaid at least some of their debt.
Less known are the debt limitations of Chapter 13. Under section 109 of the Bankruptcy Code, if a debtor (and spouse, if filing jointly) owes more than $360,475 in unsecured debt, or more than $1,081,400 in secured debt, they do not qualify for Chapter 13. What this means is that for a high debt, high income debtor, she cannot file for either Chapter 7 or Chapter 13.
Consider a debtor earning $100,000/year, single, who bought a house in 2007, at the height of the real estate market. In today's market that house is worth $400,000 and she owes $750,000. Since the house is only worth $400,000, $350,000 of that debt is unsecured. If she has in excess of $10,475 in other unsecured debt, such as credit cards, doctor bills, student loans, etc. this person doesn't qualify for Chapter 13. But due to her income, she can't file Chapter 7, either (and she might not want to for various reasons). Her only option is to file a consumer Chapter 11, a very expensive and time consuming proposition.
Tuesday, June 8, 2010
Family Meetings in Estate Planning
One often overlooked tool of estate planning is to hold a family meeting. There are several good reasons for doing this, and a few reasons why many people don't hold a family meeting.
A family meeting first and foremost should be an opportunity to make wishes and desires known and acknowledged and documented so they are carried out. This last item, documentation, may require the services of a qualified attorney. Simply writing down that mom and dad want the house to go to a certain person might not be enough. Everyone might agree that is what mom and dad wanted, but unless there is a will or other legally effective device, it might not happen.
Another reason for a family meeting is to ease anxieties about what will happen. It's a time to discuss last wishes such as funeral arrangements, burial/cremation, etc. While this is hard to do, afterward everyone feels a sense of relief.
At a family meeting, tax advantageous strategies for passing wealth can be discussed, such as family trusts, limited liability companies, life insurance policies to provide cash flow to continue a business and the like.
A very important function, and one often overlooked, is to preserve family harmony. At a family meeting, everyone's viewpoints can be aired. While it is the prerogative of those whose estates are in issue to decide where and to whom they leave things, by getting everyone together to discuss things, when the will is finally read there should be no big surprises.
Don't overlook a family meeting as part of your estate plan.
A family meeting first and foremost should be an opportunity to make wishes and desires known and acknowledged and documented so they are carried out. This last item, documentation, may require the services of a qualified attorney. Simply writing down that mom and dad want the house to go to a certain person might not be enough. Everyone might agree that is what mom and dad wanted, but unless there is a will or other legally effective device, it might not happen.
Another reason for a family meeting is to ease anxieties about what will happen. It's a time to discuss last wishes such as funeral arrangements, burial/cremation, etc. While this is hard to do, afterward everyone feels a sense of relief.
At a family meeting, tax advantageous strategies for passing wealth can be discussed, such as family trusts, limited liability companies, life insurance policies to provide cash flow to continue a business and the like.
A very important function, and one often overlooked, is to preserve family harmony. At a family meeting, everyone's viewpoints can be aired. While it is the prerogative of those whose estates are in issue to decide where and to whom they leave things, by getting everyone together to discuss things, when the will is finally read there should be no big surprises.
Don't overlook a family meeting as part of your estate plan.
Friday, May 21, 2010
Adversary Proceedings in Bankruptcy
You may hear the term "adversary proceeding" and wonder what that is all about. An adversary proceeding is a lawsuit within a bankruptcy. Most of bankruptcy is an administrative matter. The trustee administers the assets by converting them to cash, usually by selling them, and then determining who is owed what and making a distribution of the cash she has to those claimants.
Sometimes there is a matter that needs to be litigated before the bankruptcy judge. An example might be if a creditor believes a debt was incurred fraudulently and wants to object to the discharge of that debt. The creditor would file an adversary proceeding by filing a complaint in the bankruptcy court. The adversary proceeding proceeds just like a lawsuit, with the debtor then filing an answer, discovery taking place, motions, and, ultimately, a trial.
Adversary proceedings are rare. In most cases, if an adversary proceeding is filed, the fee that you paid to your attorney for the bankruptcy will not cover the costs of defending the adversary proceeding.
Sometimes there is a matter that needs to be litigated before the bankruptcy judge. An example might be if a creditor believes a debt was incurred fraudulently and wants to object to the discharge of that debt. The creditor would file an adversary proceeding by filing a complaint in the bankruptcy court. The adversary proceeding proceeds just like a lawsuit, with the debtor then filing an answer, discovery taking place, motions, and, ultimately, a trial.
Adversary proceedings are rare. In most cases, if an adversary proceeding is filed, the fee that you paid to your attorney for the bankruptcy will not cover the costs of defending the adversary proceeding.
Monday, April 26, 2010
Another reason to see a lawyer about a will
Several posts back, I questioned the wisdom of using online will and trust forms, or the celebrity will and trust devices (like the Suze Orman documents). Here's a story out of New York in case you're still convinced that you don't need a lawyer to prepare your will.
Harry Wu served as one of two witnesses to his sister's will. Though he was not named as a beneficiary under the will, he was named as a beneficiary under a life insurance policy that his sister had. The will had a common clause that said that taxes, such as estate taxes, should be paid out of the "residuary estate," and not apportioned among those receiving property under the will. Despite this clause, the executor of the will challenged Harry's right not to have to share in payment of estate taxes because of a New York law that prohibits a witness of a will from benefitting from a distribution under the will. The court in New York agreed with the executor and Harry had to pay a share of the estate taxes on the $3 million estate.
It's little things like this New York law that the average person doesn't know about that make using an online form or one you got on a CD that comes with a book so dangerous. Yes, paying a lawyer to draw up your will is much more expensive than $29.95 for a book or a form you download from the Internet, but ask Harry Wu about hidden traps.
Harry Wu served as one of two witnesses to his sister's will. Though he was not named as a beneficiary under the will, he was named as a beneficiary under a life insurance policy that his sister had. The will had a common clause that said that taxes, such as estate taxes, should be paid out of the "residuary estate," and not apportioned among those receiving property under the will. Despite this clause, the executor of the will challenged Harry's right not to have to share in payment of estate taxes because of a New York law that prohibits a witness of a will from benefitting from a distribution under the will. The court in New York agreed with the executor and Harry had to pay a share of the estate taxes on the $3 million estate.
It's little things like this New York law that the average person doesn't know about that make using an online form or one you got on a CD that comes with a book so dangerous. Yes, paying a lawyer to draw up your will is much more expensive than $29.95 for a book or a form you download from the Internet, but ask Harry Wu about hidden traps.
Wednesday, April 21, 2010
Family Limited Partnerships
You may have heard of a family limited partnership, or FLP, as an estate planning device. A FLP is just a limited partnership formed for the benefit of family members. Limited partnerships have several benefits over general partnerships, the greatest of which is that limited partners are shielded from liability beyond the extent of their investment or contribution to the limited partnership. In addition, because a separate legal entity, the FLP, owns the assets that are transferred to it, those assets are out of the estate of the individuals, and need not pass through probate, nor be subjected to an estate tax, upon death. For these reasons, FLPs have gained popularity in recent years.
However, as an estate planning tool, FLPs are only for the wealthy. They require expertise to create, involve complex issues of valuation of property that is contributed, and they must be managed as long as they are in existence. In short, unless there are assets of around $1 million that can be put into the FLP, their cost and effort do not justify the benefits. For most people, a FLP is neither necessary nor desirable.
However, as an estate planning tool, FLPs are only for the wealthy. They require expertise to create, involve complex issues of valuation of property that is contributed, and they must be managed as long as they are in existence. In short, unless there are assets of around $1 million that can be put into the FLP, their cost and effort do not justify the benefits. For most people, a FLP is neither necessary nor desirable.
Monday, April 19, 2010
Debt Settlement Agencies
You hear it on the radio or even late-night TV informercials: "Don't file bankruptcy; settle your debt for pennies on the dollar. Call us -- we know the secrets the credit card companies don't want you to know." Some of them even tell you that you have the "right" to settle for less. Do these work?
I can't speak for every such agency. Some are non-profit organizations that really do help SOME people. But most are nothing more than scams. They want you to send them money up front, and then they'll contact your creditors and work their magic. It almost never works. In the meantime, you stop paying your bills, your interest rates go up because you're in default, you start getting calls (if you weren't already), and eventually you get sued and your wages are garnished. Finally the debt settlement agency tells you they tried, it just didn't work.
Does this mean you should never try to work something out with your creditors? Absolutely not. By all means, if you can work out a settlement, do so. But before you pay someone to do it for you, look into it closely.
I can't speak for every such agency. Some are non-profit organizations that really do help SOME people. But most are nothing more than scams. They want you to send them money up front, and then they'll contact your creditors and work their magic. It almost never works. In the meantime, you stop paying your bills, your interest rates go up because you're in default, you start getting calls (if you weren't already), and eventually you get sued and your wages are garnished. Finally the debt settlement agency tells you they tried, it just didn't work.
Does this mean you should never try to work something out with your creditors? Absolutely not. By all means, if you can work out a settlement, do so. But before you pay someone to do it for you, look into it closely.
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