The American Taxpayer Relief Act of 2012 has an important provision that is now permanent after a two-year trial period. It allows the $5.25 million estate tax exemption of one spouse to be carried forward to the surviving spouse. In the past the exemption was personal and was lost upon death to the extent it hadn't already been used. As a result, the Marital Deduction or A-B Trust came into play, whereby the decedent's estate was divided into two portions, one to take advantage of the marital deduction, the other to use the unlimited spousal exemption.
Now, with portability, if the first spouse has an estate under the cap, currently $5.25 million, he can pass that exemption to the surviving spouse, who can then add it to her own $5.25 million exemption for a total of $10.5 million that she can leave tax-free. Any unused portion of the $5.25 million exemption can similarly be transferred to the surviving spouse.
As Deborah L. Jacobs of Forbes magazine explains in this article, even if no estate tax return is due from the first spouse, the executor must still file an estate tax return, Form 706, in order to preserve the portability. Failure to do that results in the loss of the first exemption.
Showing posts with label exemptions. Show all posts
Showing posts with label exemptions. Show all posts
Thursday, January 24, 2013
Thursday, January 10, 2013
Bad News for Debtors?
The Utah Supreme Court gave debtors a lump of coal for Christmas in the form of its opinion in Gladwell v. Reinhart, 2012 UT 82 (December 4, 2012), a case certified to it by the Tenth Circuit Court of Appeals in Denver to answer a question of state law. The issue arose in Dr. Reinhart's bankruptcy. Dr. Reinhart claimed an exemption in 75% of the wages owed to him but unpaid as of the date of his bankruptcy petition. This is common practice among bankruptcy attorneys in Utah and it had been universally recognized. Occasionally a trustee would demand the other 25% that wasn't exempt under Utah's exemption statute, but most of the time the debtor kept 100% of any unpaid wages as of the filing date.
In the Reinhart case, the Chapter 7 trustee challenged the claim of exemption. The bankruptcy court denied the trustee's objection, following the practice that had been in place for years. The district court upheld the bankruptcy court. On appeal to the Tenth Circuit, the Court of Appeals certified the case to the Utah Supreme Court. "Certification" is a process by which a federal court, called upon to answer a previously unanswered question of state law, can ask the highest court of the state to determine the answer.
On certification the Utah Supreme Court held that the exemption statute in question, Utah Code section 70C-7-103, does not to allow a debtor in bankruptcy to claim an exemption for 75% of the wages owed to him but unpaid as of the date of filing. In other words, 100% of what a debtor is expecting in his next paycheck after he files is subject to being taken by the bankruptcy trustee as "property of the estate."
In the past most debtors' attorneys have timed the filing of the bankruptcy petition to a date just before a payday so that what is in the debtor's checking account at the time of filing is almost nothing, relying on section 70C-7-103 to exempt what is owed to the debtor. With the ruling in Reinhart debtors risk losing their entire next paycheck after they file. And, if they wait and file the day after payday, so that what is owed but unpaid is a small amount, any money still in their account from that paycheck on the day they file is subject to being taken. The Utah Supreme Court has effectively ruled that the debtor's last paycheck before filing is forfeited to his estate, meaning debtors will have to skip a payday in order to file.
Utah being the debtor-unfriendly state that it is, don't expect the Utah legislature to correct this problem any time soon.
In the Reinhart case, the Chapter 7 trustee challenged the claim of exemption. The bankruptcy court denied the trustee's objection, following the practice that had been in place for years. The district court upheld the bankruptcy court. On appeal to the Tenth Circuit, the Court of Appeals certified the case to the Utah Supreme Court. "Certification" is a process by which a federal court, called upon to answer a previously unanswered question of state law, can ask the highest court of the state to determine the answer.
On certification the Utah Supreme Court held that the exemption statute in question, Utah Code section 70C-7-103, does not to allow a debtor in bankruptcy to claim an exemption for 75% of the wages owed to him but unpaid as of the date of filing. In other words, 100% of what a debtor is expecting in his next paycheck after he files is subject to being taken by the bankruptcy trustee as "property of the estate."
In the past most debtors' attorneys have timed the filing of the bankruptcy petition to a date just before a payday so that what is in the debtor's checking account at the time of filing is almost nothing, relying on section 70C-7-103 to exempt what is owed to the debtor. With the ruling in Reinhart debtors risk losing their entire next paycheck after they file. And, if they wait and file the day after payday, so that what is owed but unpaid is a small amount, any money still in their account from that paycheck on the day they file is subject to being taken. The Utah Supreme Court has effectively ruled that the debtor's last paycheck before filing is forfeited to his estate, meaning debtors will have to skip a payday in order to file.
Utah being the debtor-unfriendly state that it is, don't expect the Utah legislature to correct this problem any time soon.
Wednesday, November 7, 2012
Post Election Uncertainty
The great election of 2012 is now history and President Obama will serve another four years. In response to his re-election the NYSE dropped to its lowest point in a year. That's probably the best indication that business doesn't favor what the future might hold under a second Obama administration.
One issue that has been waiting for resolution until after the election is the estate and gift tax. The Bush era tax cuts are set to expire at the end of the year, reverting the estate and gift tax exemption to $1,000,000 from its current $5+ million. If that should happen (and that's a big IF), a lot of families could get caught with an unexpected estate tax. Five million is a lot of money in an estate, but one million, even with today's depressed real estate values, is not that uncommon.
There's no clear-cut answer. President Obama has said he's in favor of allowing the tax cuts to expire. Does that mean he would veto an extension if passed by Congress? Give that the House is under Republican control while the Senate is under the Democrats, will Congress even work together to pass a bill in time to present to the president? Most advisers are saying to use your exemption while it exists if you would have an estate tax issue under a reduced, $1,000,000, exemption. If you fall in that category, or even think you might, talk to a qualified estate planning attorney.
One issue that has been waiting for resolution until after the election is the estate and gift tax. The Bush era tax cuts are set to expire at the end of the year, reverting the estate and gift tax exemption to $1,000,000 from its current $5+ million. If that should happen (and that's a big IF), a lot of families could get caught with an unexpected estate tax. Five million is a lot of money in an estate, but one million, even with today's depressed real estate values, is not that uncommon.
There's no clear-cut answer. President Obama has said he's in favor of allowing the tax cuts to expire. Does that mean he would veto an extension if passed by Congress? Give that the House is under Republican control while the Senate is under the Democrats, will Congress even work together to pass a bill in time to present to the president? Most advisers are saying to use your exemption while it exists if you would have an estate tax issue under a reduced, $1,000,000, exemption. If you fall in that category, or even think you might, talk to a qualified estate planning attorney.
Tuesday, August 30, 2011
Bankruptcy Exemptions
I was faced with an interesting question from a client this week. Up until recently ago he lived in California. For six years he has owned a condo in Utah. Four months ago he moved to Utah and now lives in the condo. He needs to file bankruptcy and wants to know which state's exemptions, Utah or California, he can use. He wants to use California because their homestead exemption is $75,000 whereas Utah's is $20,000.
Section 522 of the Bankruptcy Code says that a person uses the exemptions in the state where he has had his domicile for the past 730 days (two years), unless the person hasn't lived in a single state for that time. If, like this person, a debtor has lived in two or more states in the past two years, then he uses the exemptions in the state where he lived the longest portion of the 180 days immediately preceding the two year period. This convoluted and confusing statute is part of the BAPCPA enacted in 2005 and its purpose is to prevent debtors from moving to states with more liberal exemption laws and then filing bankruptcy.
In this case, section 522 helps my potential client because he lived in California for the full 180 days prior to the two year period back to August 2009. So he will get to claim the California exemption even on his condo in Utah.
Section 522 of the Bankruptcy Code says that a person uses the exemptions in the state where he has had his domicile for the past 730 days (two years), unless the person hasn't lived in a single state for that time. If, like this person, a debtor has lived in two or more states in the past two years, then he uses the exemptions in the state where he lived the longest portion of the 180 days immediately preceding the two year period. This convoluted and confusing statute is part of the BAPCPA enacted in 2005 and its purpose is to prevent debtors from moving to states with more liberal exemption laws and then filing bankruptcy.
In this case, section 522 helps my potential client because he lived in California for the full 180 days prior to the two year period back to August 2009. So he will get to claim the California exemption even on his condo in Utah.
Thursday, February 10, 2011
Exemptions in Bankruptcy
When you file bankruptcy, almost everything you own becomes part of your bankruptcy estate. The estate is the pile of stuff from which the trustee can sell or liquidate to raise money. With that money, he pays creditors on a pro-rata basis. Some of the property in the estate is exempt, meaning the trustee can't touch it.
Exemptions can be full or partial. Full exemptions are things like household furnishings (subject to their being included in the list of exemptions). These include things like washers, dryers, refrigerators, beds, personal clothing, most furniture and the like. Also included in a full exemption are IRAs and 401Ks and other qualified retirement accounts. In Utah contributions made to such accounts in the past year are not exempt, but under federal law, all contributions are exempt. Make sure your attorney claims the federal exemption as well as the state exemption or you could lose contributions made in the last 12 months.
Partial exemptions are exemptions based on dollar values. For example, Utah law exempts $2,500 for a vehicle, per person. It also exempts $20,000 for a homestead exemption. Both of these dollar amounts have been on the books for over 20 years and are woefully outdated. Who can get a reliable car for $2,500? Yet that's all Utah law allows a debtor to acquire a vehicle to get to and from work. And $20,000 ($40,000 if married and filing jointly) for a house? While that's a more generous amount due to the recent downturn in the housing market, truly what does $20,000 do to protect your home, which is the purpose of a homestead exemption.
Don't count on the Utah legislature to update exemptions any time soon, though. Utah is one of the most creditor-friendly states in the nation, which is one reason it has one of the highest percentages of bankruptcy filings.
Exemptions can be full or partial. Full exemptions are things like household furnishings (subject to their being included in the list of exemptions). These include things like washers, dryers, refrigerators, beds, personal clothing, most furniture and the like. Also included in a full exemption are IRAs and 401Ks and other qualified retirement accounts. In Utah contributions made to such accounts in the past year are not exempt, but under federal law, all contributions are exempt. Make sure your attorney claims the federal exemption as well as the state exemption or you could lose contributions made in the last 12 months.
Partial exemptions are exemptions based on dollar values. For example, Utah law exempts $2,500 for a vehicle, per person. It also exempts $20,000 for a homestead exemption. Both of these dollar amounts have been on the books for over 20 years and are woefully outdated. Who can get a reliable car for $2,500? Yet that's all Utah law allows a debtor to acquire a vehicle to get to and from work. And $20,000 ($40,000 if married and filing jointly) for a house? While that's a more generous amount due to the recent downturn in the housing market, truly what does $20,000 do to protect your home, which is the purpose of a homestead exemption.
Don't count on the Utah legislature to update exemptions any time soon, though. Utah is one of the most creditor-friendly states in the nation, which is one reason it has one of the highest percentages of bankruptcy filings.
Wednesday, January 20, 2010
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.
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.
Friday, January 15, 2010
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.
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