Carryover Basis Complicates Planning / Settlement

I have been asked a lot of questions about the new carryover basis rules and what this means for someone who inherits property in 2010. Simply put, repeal of the federal estate tax that has taken effect in 2010 means that the stepped up basis that the inheritor would have received in 2009 and prior years is officially gone.

The good news is, that for most smaller estates, the practical effect of the change is non-existent. Moderate and larger estates, however, will now find additional taxes, and complications.

A stepped up basis means that the recipient of an inherited asset gets to increase the income tax basis of the asset to its date of death fair market value, which in turn is the basis used for calculating capital gains taxes when the inherited asset is sold. But not so now - instead for deaths occurring in 2010 an heir will receive the decedent's original basis in the inherited asset, which can be adjusted by the executor or personal representative using the new modified carryover basis rules. The personal representative call allocate additional basis to the property received by the beneficiary, in order to reduce the capital gain.

In 2009 and years prior, for example, if a beneficiary inherited a house that cost the decedent $500,000 but

No Estate Tax in 2010 - Good and Bad News

There is currently no tax on the estates of those dying during 2010.   Although it is possible that Congress could reinstate the tax retroactively in 2010, the possibility is uncertain, at best.  If Congress fails to act, however, although a few wealthy families will benefit, many families with smaller estates will pay capital gains on inherited assets.  Moreover, executors and successor trustees must contend with new, and what may prove to be significant, administrative burdens.

Under the provisions of a Bush-era tax-cut bill enacted in 2001, the value of estates exempt from the tax has increased over the past eight years while the tax rate on estates has been reduced, so that in 2009 only an individual estate worth $3.5 million or more is taxed, at a rate of 45 percent. For the year 2010, according to the 2001 law, the estate tax disappears entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more.

For persons with larger estates, their estate plans will need to reviewed and reconciled with the lack of

Strange Suit Against Michael Jackson's Estate

After reading that a taxpayer had sued the Michael Jackson estate to recover money spent for his memorial, I suspected that there would be other cases.  Of course, a quick google search revealed an interesting case, reported by TMZ.   TMZ reported last week that "[a] woman who claims to have spent 2,000 hours analyzing the extended family of Michael Jackson -- including children, birth mother(s), sperm donor claims ... and on and on ... wants more than $2 million from Michael Jackson's estate." 


According to TMZ, "Claire McMillan says she's a 'homeschool expert' who did 'a thorough analysis' of Jackson's complete extended family, to determine ... well, it's not clear why she was doing it.  Whatever ... she concluded that Katherine Jackson is doing 'a poor job outside of the home, related to - grooming, age, and psyc (sic) appropriate activities, same-sex, academic & soc interactions w/ non-extended family children .... ' oh, what's the use? It makes no sense." 

TMZ reports that McMillan claims she also inquired as to whether Dr. Arnold Klein would be interested in obtaining guardianship of the children with McMillan and her husband.  McMillan claims that her time is worth $1,000 an hour, and she wants $2,002,000 for her efforts.  Wow!

Howard Weitzman, lawyer for the Michael Jackson estate, reportedly told TMZ that, "[t]o the best of our knowledge, Ms. McMillan never did anything for the estate and the estate owes her nothing."  TMZ goes so far as to characterize the suit as a "Crazy Creditor's Claim."  No clarification if TMZ is saying the claim is crazy, the creditor is crazy, or both.

You can read more here.

Michael Jackson's Estate Sued Over Memorial

The Michael Jackson memorial in Los Angeles last July reportedly cost the cash-strapped city millions of dollars in police overtime and sanitation expenses, and now one  resident wants  Michael Jackson's family to pay the bill. According to the Associated Press, Jose F. Vallejo is seeking $3.3 million from Jackson’s estate.  The lawsuit, typically called a taxpayer's suit, is brought under a California law which permits taxpayers to sue in order to recover money on behalf of a governmental entity to which the taxpayer pays taxes. The taxpayer has requested that the money be deposited into the treasury for the City of Los Angeles.  Although the taxpayer typically does not benefit directly from the action, there are typically attorney fees which may have to be paid either by the defendant or the City, depending upon the outcome of the case.  The taxpayer benefits, at least theoretically, indirectly by reduced need for taxation.

Ohio, too, has a statute which permits taxpayer suits in certain cases. 

While the memorial cost the city millions, it also reportedly earned $4 million for the city’s hotels, restaurants

Laddering Fixed Annuities for Cash Accumulation

The July issue of Advisor Today introduces a unique cash accumulation strategy that merits close attention: laddering fixed annuities. MassMutual has back tested the strategy against several traditional strategies, and demonstrated its strength.

The strategy is simple. In addition to a portfolio of equities and bonds, simply make an initial purchase of a life-only fixed income annuity, with additional proportional fixed annuity purchases annually. Over a twenty-seven year period, the strategy resulted in a liquid account value of more than seven times the original deposit. This compared to an account value of only five times the original deposit when invested in a traditional equities and bonds only portfolio.

While the common misconception is that the inclusion of a fixed annuity in the mix impairs the liquidity of the portfolio, the performance over the intermediate and long-terms certainly made the short term illiquidity a risk worth taking.

Consequently, a retirement plan may benefit from the use of three asset classes- equities, bonds, and fixed income annuities. Retirees can build more wealth by making incremental annuity purchases with assets transferred from mutual fund accounts, for example.

The strategy also greatly increases the safety of the portfolio. Fixed income annuities are safe. They also are, in many states better protected from creditors. One would think these benefits would only be icing on the cake, given the strategy can outperform a traditional portfolio.

But the real icing on the cake, is building for your clients the opportunity to guarantee a stream of income that your clients cannot outlive. In these years of increasing life expectancies, the real "treat" is ensuring that the client can live the reminder of his or her life without concern whether the money will run out.

In August 2007, in the articles section of the Estate Planning Information Center, I reported about a study, co-sponsored by the Wharton Financial Institutions Center at the University of Pennsylvania and New York Life Insurance Company, identifying lifetime income annuities as the most cost-effective and least risky asset class for generating guaranteed retirement income for life.

The Wharton academic study revealed that:

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  Income annuities can provide secure income for one's entire lifetime for 25-40% less money than it would cost an individual to provide a similar level of secure lifetime income through traditional means, thanks to an insurer's ability to spread risk across large numbers of people;
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  Consumers are not annuitizing enough of their portfolios even though income annuities are low-cost, available from creditworthy insurers, and provide guaranteed payments for life. Equities, fixed income and other investment products like mutual funds carry the risk of outliving one's nest egg;
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  By covering at least basic living expenses with income annuities, consumers have much greater flexibility in other areas of a retirement plan, including the ability to take more investment risk with the remaining portfolio; and
• Recent innovations in income annuities, such as annual inflation adjustments, legacy benefits and access to capital in emergencies, have helped elevate the products to a desirable asset class in retirement.

The findings are outlined in a paper entitled "Investing Your Lump Sum at Retirement," which is based on an academic study entitled "Rational Decumulation," co-authored by Professor David F. Babbel of The Wharton School and Professor Craig B. Merrill of The Marriott School of Management at Brigham Young University. The study explored financial options for retirees and compared income annuities with other asset classes in retirement.

"Living too long is fast becoming the major financial risk of the 21st century," said Professor Babbel. "Combined with the challenges facing Social Security and the decline of corporate pensions, this adds up to a 'perfect storm' for retirees who might outlive their retirement nest egg."

Only lifetime income annuities can in an efficient way protect from the risk of outliving assets. This simply cannot be duplicated by other types of investments.