American Taxpayer Relief Act- Where Things Stand

Whether living in the metro Phoenix area or the Sun City Peoria area, most of my clients are interested in the following highlights: All the individual "Bush era" tax rates are retained with the addition of a new top rate of 39.6% imposed on income over $450,000 for married taxpayers filing jointly or $400,000 for single taxpayers. The capital gains and dividend rate has increased to 20% for those taxpayers in the top bracket and remains at 15% for the middle brackets and zero for taxpayers in the 10% and 15% brackets. The estate and gift tax exclusion amount remains unified at $5 million indexed for inflation (in 2012 it was $5.12 Million) but the top rate increases from 35% to 40% effective January 1, 2013. Also, the "portability" election, allowing the surviving spouse to utilize the deceased spouse's unused exemption, has been made permanent. The threshold amount for the extra income taxes passed as part of the Healthcare Reform Legislation did not change. The employee portion of the Medicare tax, normally 1.45% of covered wages, increased by 0.9% on wages exceeding $250,000 for married taxpayers filing jointly. There is an additional Medicare tax on investment income on individuals with modified adjusted gross income greater than $250,000 for married taxpayers filing jointly. The 3.8% tax is on the lesser of the taxpayer's net investment income or the excess of the taxpayer's modified adjusted gross income in excess of $250,000 for married taxpayers filing jointly. Net investment income includes interest, dividends, annuities, royalties, rents, capital gain and passive activity trade or business income.

Estate Tax Exclusion Extended

It appears that the fiscal cliff has been avoided and that has included the Estate Tax Exclusion to be left at the $5 Million, indexed at inflation, so it should be something more than the the $5.12 Million set in 2012. The top estate and gift tax rate was increased to 40% though. Information about the new law is coming in as it is being analyzed. Further, the Bush tax cuts were continued for individuals earning $400,000 or couples earning $450,000. I have not heard reports as to whether the law is permanent or set for several years, like the prior law. Also, we are still waiting to hear if the income cap for additional 3.8% tax for the health care law is still $250,000 or the $400,000/$450,000 applicable to the extension of the Bush tax cuts.

Checking Your Lists

While we wait to see what Congress is doing about the fiscal cliff and the estate tax exemption, this is a good time to make sure that you have properly listed your beneficiaries for your IRAs, 401ks, life insurance and annuities. Even with a trust, if you have not filled out your beneficiary forms, your estate could need to be probated. Also, be sure you have all the updated addresses and contact information for your agents for health and finances. Most health care powers of attorney have the contact information of the agents on the documents.

Do No Contest Clauses work? Not too well. Previously, if an omitted heir could establish that he had probable clause to challenge the no contest clause (such as because the writer of the Will was under mistake or undue influence) the court would allow a challenge to the Will and not enforce the no contest clause. In a recent case, In Re Estate of Stewart, the Arizona Court of Appeals stated that if the no contest clause prohibited devisees or beneficiaries from assisting the omitted heir, the court would interpret this as enforceable as long as the beneficiary was deposed or subpoenaed. The beneficiary could not "voluntarily" give information to the omitted heir where the no contest clause prohibited it.

Trusts and Agreements help balance family and new relationships

We live so much longer now, many of us start a second adulthood in our 59s and 60s. Sometimes with a new career. Sometimes with a new love. Estate planning, such as with a trust or domestic partnership agreement,can balance the need to provide for a new love and the desired gifts to adult children. A domestic partnership agreement is similar to a pre-nuptial agreement and used when couples do not marry. If a couple is planning to marry or has married than pre-nuptial or post-marriage agreements are great tools to ease family relationships.

Gun Trusts Can Limit Taxation Upon Death And Help with Multiple Users

Gun Trusts are revocable trusts different and separate from a revocable living trust normally used for estate planning. With a Gun Trust, multiple owners (spouses or parents and adult child) can own firearms together, and when one dies, the other remains the Trustee and additional transfer tax should not be needed. Also, Gun Trusts allow guns to be distributed without violating federal law. That is, if a beneficiary is a minor or otherwise unqualified to have a firearm, the Trustee cannot distribute the firearm but has instructions for sale or alternative distribution. Also, for spouses where one uses the firearms occasionally only, the Gun Trust would allow the spouse as Trustee or designated beneficiary to use the firearm without violating the limitations of use to owners which apply to NFA firearms. Gun Trusts are helpful for both NFA firearms (such as automatic weaponry) and non-NFA firearms. For more information, feel free to contact me.

Changes in Revocations of Beneficiary Deeds

Revocations of Beneficiary Deeds now need to reference the name of the Grantee that was listed on the beneficiary deed, as well as the recording instrument number of the beneficiary deed in order for the Maricopa County Recorder to accept the Revocation. This changes was not done by rule and adds a requirement to the statutory form. It is likely the new requirement helps the Maricopa County Recorder index the beneficiaries.