Life insurance basics

Posted on May 3, 2009 by Saul Elnadav
The New York Times published a basic article on life and disability insurance last week.  See Life and Disability Insurance: What You Need to Know, Paul Sullivan, New York Times, April 28, 2009.   

From the article:

Life insurance comes in a variety of forms meant to accomplish a range of objectives, from providing for survivors to moving assets out of your estate. The prices for it depend not only upon how much coverage you want but also upon what type of policy you get, either for a finite period of time or indefinitely.

Sullivan explains the basic differences between term life and whole life insurance, encourages consumers to check on the financial soundness of insurance companies, and provides links to other resources on purchasing insurance and selecting a broker.

Read the full article here.

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Tough luck for dumb luck

Posted on April 28, 2009 by Saul Elnadav

I previously linked several editorials arguing for and against the estate tax.  A frequent argument in favor of lower taxes, heard again at the recent anti-tax tea parties, is that taxing income and wealth strains the relationship between effort and reward.  Higher taxes are a disincentive to working hard.

The New York Times recently published an article arguing that such arguments rely on the false assumption that that there is a clear connection between effort and financial wealth.  See Before Tea, Thank Your Lucky Stars, Robert H. Frank, New York Times, 4/25/09.

Excerpts from article:

Contrary to what many parents tell their children, talent and hard work are neither necessary nor sufficient for economic success. It helps to be talented and hard-working, of course, yet some people enjoy spectacular success despite having neither attribute. * * * Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich — disparities that often stem from random events.

* * *

Another important message of recent research is that a person’s salary depends far more on where she is born than on her talent and effort. * * * Well-paid Americans owe an enormous, if rarely acknowledged, debt to the social investments that supported their success.

* * *

[W]hen government levies higher tax rates on the wealthy, we can provide public services that the wealthy and others greatly value but that would otherwise be beyond reach. Under such a tax system, the heavier tax bill becomes payable only if we’re lucky enough to end up among life’s biggest winners.

Financially successful tax protesters seem blissfully unaware of how incredibly fortunate they are. To borrow from the late Ann Richards and her description of the first President Bush, they were born on third base and thought they’d hit a triple.

Read the full article here.

It’s a provocative argument.  I suspect, however, that many wealthy people who are committed to philanthropy would agree that luck and circumstances outside their control contribute to their wealth and that, as a result, they are morally obligated to society for their opportunities.  However, this doesn’t necessarily lead to the belief that governmental taxing and spending is fiscally sound or that it creates the circumstances for economic and social progress.  After all, individual and family philanthropy has a long history of improving society, while the modern tax on income and wealth transfers is a relatively new thing in the United States.

Thoughts, anyone?

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“Major revisions to New York Power of Attorney Law” in the Nassau Lawyer

Posted on April 23, 2009 by Saul Elnadav

New York State’s revised power of attorney law will go into effect on September 1, 2009, following a six month postponement. The legislature’s stated reason for the postponement was to allow additional time to educate the legal community on the comprehensive changes to the law. Over the past month or so, there have been some excellent articles in the state and local bar association publications.

Below is a scanned copy of an article I wrote for the Nassau Lawyer, published by the Nassau County Bar Association.

Clicking on the image will enlarge it in your browser.

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Common sense estate planning: Get Organized!

Posted on April 21, 2009 by Saul Elnadav
If you need an incentive to organize your financial life, see The Mess They Left by Suzanne Barlyn, Wall Street Journal, April 13, 2009. 

Excerpts from the article:

In the torrent of estate-planning advice out there, one simple but crucial bit of wisdom often gets overlooked: Keep your stuff in order.

Surviving family members can get overwhelmed when loved ones leave behind disorganized financial statements and cluttered homes. Heirs and executors must become de facto investigators, sorting through the junk to figure out where the assets are — and what should be done with them.

Read the rest of the article here.

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Estate Tax Debate: Recent Editorials

Posted on April 6, 2009 by Saul Elnadav
With the estate tax to be repealed at the end of 2009 unless new legislation is passed, the political debate over the economic and moral value of the estate tax is being renewed. 

The Senate Finance Committee is considering the Baucus proposal, which I wrote about last week. The House Ways and Means Committee is considering H.R. 436, a bill which would make permanent the $3.5 million exemption and a top tax rate of 45%. An additional tax would be imposed on estates over $10 million to phase out the effects of graduated estate tax rate and the unified credit. In addition, H.R. 436 would limit the availability of the controversial valuation discounts for transfers of minority and/or restricted interests in property.

Last week, the Senate approved a budget amendment that would raise the estate tax exemption from $3.5 million to $5 million, and reduce the tax’s maximum rate from 45% to 35 percent. It approved another amendment blocking that estate tax cut until an equal amount of tax relief was afforded, in aggregate, to people making under $100,000. The budget is not law, so don’t get too excited. It’s hard to see how Congress can cut taxes that much while also increasing spending.

For recent editorials for and against the estate tax, see the following:

Spend It in Vegas or Die Paying Taxes, by Arthur B. Laffer, Wall Street Journal, 4/2/09, arguing that the estate tax is economically inefficient and creates the wrong incentives:

Today in America you can take your after-tax income and go to Las Vegas and carouse, gamble, drink and smoke, and as far as our government is concerned that’s just fine. But if you take that same after-tax income and leave it to your children and grandchildren, the government will tax that after-tax income one additional time at rates up to 55%.

The Forgotten Rich, New York Times, 4/1/09, arguing that estate tax opponents create wrong impressions of the reach and effect of the estate tax, and that the estate tax creates the right incentives:

The estate tax creates a big incentive for high-end philanthropy, because charitable bequests are exempt. On Tuesday, Independent Sector, a nonpartisan charitable coalition representing thousands of public charities, private foundations and corporate-giving programs, urged the Senate to reject the Lincoln-Kyl amendment and to keep the tax as proposed in the Obama budget.

More Tax Cuts for the Rich?, Washington Post, 4/2/09, arguing that proposals to reduce the estate tax in the current economic environment are “outrageous and nonsensical.”

No surprises, given the sources. I will link more articles as I come across them.
 
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Estate Tax: The Baucus Proposal

Posted on April 3, 2009 by Saul Elnadav

Senate Finance Committee Chairman Max Baucus (D-Mont.) recently announced proposed legislation that would amend the tax code. Among other provisions, the bill, known as “The Taxpayer Certainty and Relief Act of 2009,” (S. 722) would implement some much-discussed and anticipated changes to the federal gift and estate tax law.

The last major change to the federal gift and estate tax law was the Economic Growth and Tax Relief Reconciliation Act of 2001. A basic summary of the current law and the changes proposed by Senator Baucus, as provided by the AALU, is as follows:

Under current law, U.S. citizens and residents must pay taxes on transfers of property both during life and at death. These taxes are due under three separate tax systems: the estate tax, the generation skipping transfer tax, and the gift tax. Currently, the top tax rate for all three taxes is 45%. Both the estate and generation-skipping transfer taxes currently have a $3.5 million exemption for individuals ($7 million for couples). The gift tax has an exemption of $1 million ($2 million for couples). For the 2010 tax year, the estate and generation skipping transfer taxes are repealed. In the same year, the gift tax rate will fall to 35%. In 2011, the estate, generation skipping transfer, and gift taxes are scheduled to revert back to pre-2001 levels, with an exemption of $1 million, a 55% rate, and a 5% surtax on large estates.

The proposal would make permanent the 2009 estate, gift, and generation skipping transfer tax laws going forward and index the exemption amount. The proposal would also reunify the estate and gift taxes. In addition, the proposal would allow portability of exemption for spouses. Finally, the proposal would increase the amount available under the special use valuation revaluation to equal the estate tax exemption. (AALU Washington Report, 3/26/2009)

In other words, as proposed, there would be no estate tax repeal for 2010. Instead, the estate tax exemption would remain at $3.5 million. A maximum tax rate of 45% would also continue into 2010. In addition, beginning in 2011, the exemption would be pegged to inflation. So, for example, a 3% CPI increase in 2010 would result in a $3,610,000 exemption for 2011.

Under current law, the estate tax exemption for 2009 is $3.5 million, but the gift tax exemption is still only $1 million. Gifts that do not qualify for the annual gift tax exclusion use the lifetime gift tax exemption. The proposed legislation would reunify gift and estate tax by increasing the gift tax exemption to the same level as the estate tax.

The proposed portability of exemption for spouses would preserve the exemption of the first spouse to die, even where the exemption amount was left outright to the surviving spouse. Under current law, couples who together have assets over $3.5 million would have to create a trust (such as a credit shelter trust) to preserve the exemption following the first spouse’s death. Under the proposed legislation, however, the estate of the first spouse to die can elect on the estate tax return to preserve any unused portion of the exemption.

A few more points about the portability proposal:

If the proposed bill becomes law, it seems that it would make sense to file a federal estate tax return even for small estates, since by doing so an unused spousal exemption can be preserved.

The proposed bill allows a surviving spouse to use the aggregate unused exemptions of all marriages, but unused exemptions cannot exceed the basic exclusion amount applicable at the time the surviving spouse dies. This prevents the accumulation of unused spousal exemptions from multiple marriages.

As Greg Herman-Giddens of the North Carolina Estate Planning Blog and others have pointed out, the proposal wouldn’t make credit shelter trusts a thing of the past, since a credit shelter trust also protects the growth of the trust assets from being taxed in the survivor’s estate. A credit shelter trust can also be used to protect assets from creditors and future spouses.

Beyond that, the portability proposal raises a whole new set of potential issues, especially with regard to estate planning for a surviving spouse in a second or third marriage whose estate can potentially benefit from the unused exemption of a previous deceased spouse.

The Baucus proposal is currently in the Senate Finance Committee. To become law, it would still have to survive the committee, pass votes in both houses of Congress and be signed by the President.

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Link between religious beliefs and end of life decisions

Posted on April 1, 2009 by Saul Elnadav

A recent medical study indicated that there is a link between religious beliefs and the types of end of life decisions people make.

The BBC reported in Pious ‘fight death the hardest’ that “people with strong religious beliefs appear to want doctors to do everything they can to keep them alive as death approaches.” The study of 345 patients with terminal cancer, conducted by the Dana-Faber Cancer Institute, reportedly found that “those who regularly prayed were more than three times more likely to receive intensive life-prolonging care than those who relied least on religion.” (Thanks to Michael Bonasera of the Ohio Trust and Estate Blog for the link.)

The BBC article further reported that this is despite downsides to intensive medical intervention.

[W]ork has been done which suggests that intensive intervention in the last few weeks and days before death may reduce a patient’s quality of life.

Researchers at the University of Pittsburgh School of Medicine found that treatments such as ventilator support, resuscitation, having a feeding tube and non-palliative chemotherapy were associated with more psychological and physical distress. The patients’ chances of dying in their preferred place were also reduced.

The Economist, in its report in the study, wrote:

Explaining the unpleasantness and futility of the procedures does not seem to make much difference, either. Holly Prigerson, one of Dr Phelps’s co-authors, was involved in another study at Dana-Farber which was published earlier this month in the Archives of Internal Medicine. This showed that when doctors had frank conversations about the end of life with terminally ill cancer patients, the patients typically chose not to request very intensive medical interventions.

According to Dr Prigerson, though, such end-of-life chats had little impact on “religious copers”, most of whom still wanted doctors to make every effort to keep them alive.

If nothing else, this underscores the importance of having a living will communicating your wishes with regard to end of life treatment. For a more detailed discussion of advance directives and the Terri Schiavo case, see VMM’s Sidebar for Spring 2005.

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Family Feud Over Estate Nears an End After 25 Years (NYTimes)

Posted on March 30, 2009 by Saul Elnadav

The New York Times published an interesting piece yesterday by Charles V. Bagli, Family Feud Over Estate Nears an End After 25 Years.

The article begins:

For nearly 30 years, Evelyn and Diana Sakow believed that their father, a small-time real estate broker and developer from the Bronx, had died broke and without a will in 1956. They worked their way through college, becoming public school teachers.

They lived quiet, uneventful lives — until 1983. That’s when Diana said she uncovered a secret while taking a night course in real estate: Not only had her father, Max, owned as many as 100 properties in the Bronx, Brooklyn and Manhattan at the time of his death, but he had left a handwritten will leaving the sisters a portion of his estate.

The revelation turned into a betrayal of biblical proportions, after the two sisters learned that their older brother, Walter, with the acquiescence of their mother, had built a real estate empire using their father’s legacy, court records and interviews show.

Read the rest of the story here.

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Estate planning during a recession

Posted on March 23, 2009 by Saul Elnadav

For an article on some estate planning considerations (and reconsiderations) during a recession, see Smaller Though It May Be, It’s Time to Look at the Estate, by Paul Sullivan, New York Times, 3/20/2009.

Excerpts from the article:

The biggest issue, given both the recession and the flux in federal estate tax laws, is whether wills already drawn up still fulfill their intent.

* * *

Just as you should periodically rebalance your portfolio, you need to rebalance your will. To take full advantage of the $7 million exemption for couples, each spouse needs to have $3.5 million of assets in his or her name. Given the across-the-board drop in asset values, spouses may want to rethink who owns what, at least on paper.

* * *

For simplicity, many people added clauses to wills that put whatever the exemption amount was in a trust for their children and left the rest to the surviving spouse, who is not subject to the estate tax. That tax-free level kept rising, from $675,000 in 2001 to $3.5 million this year. But if your estate was worth $6 million in 2001 but is now worth $4 million, allowing the new limit to go automatically into a trust would leave your spouse without enough money.

Read the full article here.

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French forced heirship law vs. New York public policy

Posted on March 20, 2009 by Saul Elnadav
According to a July 29, 2007, article in the New York Post:  

The jilted heir of storied Lazard Freres investment banker Andre Meyer, who advised Jackie Onassis, LBJ and William Paley, is making a desperate grab for his mother’s spent estate by invoking French probate law in a Manhattan court.

Patrick Gerschel, 61, the grandson of Meyer, who helmed the famed firm for 35 years, alleges that a cabal of his socialite mother’s friends siphoned $32 million of her estate.

Gerschel’s action was based on the French forced heirship law which limits the right of a domiciliary of France to disinherit children, whether by will or by gifts given during the decedent’s lifetime. Gerschel claimed that under French law his mother, Francine Meyer, was required to leave 75% of her estate to her three children, which would have come to $11 million for each child. Instead, she made lavish donations and gave gifts to friends during her lifetime, including a $17 million gift to the Emerald Foundation, a New York charity.

 

Gerschel also argued that under French law, a decedent’s children can sue to recover lifetime gifts from the gift recipients to the extent that assets passing by will or trust are insufficient to satisfy the forced heirship claim.  

The Manhattan Surrogate’s Court dismissed the claims, finding that Francine Meyer was not considered a domiciliary of France.

As today’s NYLJ reports, the Appellate Division upheld the dismissal in a written decision yesterday, but noted that the case was litigated on the incorrect premise that French law applied at all. Rather, New York has a public policy of “encouraging foreign persons to place assets in New York,” a principle illustrated by earlier decisions holding that Totten Trusts and bank accounts held by foreigners as joint tenants pass according to New York law, not the law of account holder’s domicile. Likewise,

forced heirship provisions of a civil law jurisdiction like France are inapplicable to inter vivos transfers of property executed in New York, irrespective of whether the transferor’s domicile was New York or France. This is because the validity and effect of these transfers, as well as the capacity to effect them, are governed by the law of the state where the property was situated at the time of the transfer.

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