News & Legislation

Inside Joe Paterno’s Estate Planning Ploy

joe-paternoJoe Paterno’s transfer of home ownership to his wife in July most likely was not an attempt to shield assets before a sexual-abuse scandal hit Pennsylvania State University’s football program. Instead, the move by the legendary coach more likely was made to take advantage of expiring estate tax rules, lawyers said. Mr. Paterno switched ownership of his ranch-style home in State College, PA from joint ownership with his wife, Susan, to her full ownership on July 21 in a $1 transaction, according to documents filed in Centre County, PA.

A New York Times story suggested that the move could have been an effort to shield the home from future lawsuits that may arise from the child abuse scandal that was first revealed early this month. But attorneys familiar with Pennsylvania law said that the property already was protected from creditors because it was jointly owned and therefore couldn’t be subject to creditors of only one of the spouses. The only way that the house, valued at $594,484, could be exposed to creditors is if both Mr. Paterno and his wife were targeted in a lawsuit, lawyers said.

News & Legislation

President Obama Signs Tax-Cut Bill Setting Estate Tax Exemption at $5 Million for Two Years

Barack ObamaCongress has passed and President Obama has signed into law the deal extending the Bush tax cuts that he struck with Congressional Republicans. The legislation restores the estate tax for two years at a 35 percent tax rate, with estates up to $5 million exempt from paying any tax ($10 million for couples). If Congress does not change the law in the interim, in 2013 the estate tax will revert to what it was scheduled to be in 2011 — a 55 percent rate and a $1 million exemption. The $801 billion tax-cut bill makes several other significant changes to wealth transfer taxes:

  • The new $5 million estate tax exemption and 35 percent rate are retroactive to January 1, 2010. The heirs of those dying in 2010 will have a choice between applying the new rules or electing to be covered under the rules that have applied in 2010 — no estate tax but only a limited step-up in the cost basis of inherited assets. This will benefit the heirs of tens of thousands who died in 2010 with relatively modest estates and who would have been subject to capital gains tax on inherited assets above a certain threshold.
  • The law makes the estate tax exemption “portable” between spouses. This means that if the first spouse to die does not use all of his or her $5 million exemption, the estate of the surviving spouse could use it.
  • The law unifies the estate, gift and generation-skipping transfer tax exemptions at $5 million. (For 2010 there is no generation-skipping tax, while the gift tax exemption has been $1 million for a number of years.) A 35 percent tax rate will apply to gifts or transfers over the $5 million threshold. (There is no change in the $13,000 annual exclusion amount for gifts.) These high exemption levels mean that “[t]he rich will have a two-year window in 2011 and 2012 to protect huge amounts of their estates from taxation for generations,” wrote estates attorney Kevin Staker on his Estate Tax News Blog.

But that window is open even wider than was previously assumed because of an additional loophole for the wealthy in the new law. Although taxpayers have until December 31, 2010, to transfer funds outright to grandchildren and avoid the generation-skipping tax, there’s the risk that the grandkids will squander the sudden influx of cash. As Forbes blogger Janet Novak explains in a recent post, “the money doesn’t (as most planners had believed) have to be distributed outright to the grandkids to qualify for the 0% rate. Instead, according to the fine print in the tax deal, it can be put in a trust for them, [noted estate planning lawyer Jonathan] Blattmachr says. That means, he explains, that money can be taken from an existing multigenerational trust, declared subject to the 2010 GST tax, and deposited in a new trust for grandkids’ benefit, with the GST tax now pre-paid at a 0% rate.” Novak says Blattmachr has been telling his estate planning attorney peers, “Cancel your ski trip or trip to Hawaii. This is a once-in-a-lifetime opportunity.”

The generous estate tax provisions were the main sticking point for progressive Democrats. A vote in the House on an amendment to increase the estate tax, including lowering the exemption to $3.5 million, was defeated by a vote of 233 to 194. After some minor changes to the bill were made, it passed the House by a 277 to 148 margin, after having been approved overwhelmingly by the Senate 81 to 19.

The site Politico quotes one senior House Republican aide as saying, “I’m trying to remember something that we passed under Bush that was this good.” The new tax law presents previously unavailable planning opportunities, especially for the well-off.

Just click on the following link to read the full legislation, titled the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” as originally introduced.

News & Legislation

Steinbrenner Fourth Billionaire in 2010 to Escape Taxes, If Not Death

100713George-Steinbrenner1New York Yankees owner George Steinbrenner is the fourth known U.S. billionaire to die during 2010, according to Forbes magazine. Why is this significant? Because there is no estate tax in 2010, meaning that the U.S. Treasury has lost billions in tax revenues unless Congress acts between now and the end of the year to reinstate the tax retroactively.

Steinbrenner was worth an estimated $1.5 billion, meaning his heirs could save as much as $600 million in taxes because he died this year. Steinbrenner’s wealth — mostly consisting of the Yankees, a new stadium and a regional cable network — could pass to his wife tax-free even if the estate tax were in effect, but this year she might have an incentive to disclaim (or turn down) any bequest, which would allow the assets to pass to Steinbrenner’s four children free of federal tax. (But Steinbrenner’s family would have to pay a huge capital gains tax if it were to sell any highly appreciated assets, since along with the disappearance of the estate tax, there is no “step-up” in the cost basis of inherited assets during 2010.)

The other billionaires to die in 2010 are Janet Morse Cargill of the family that founded Cargill Inc. (net worth: $1.6 billion), Texas pipeline magnate Dan Duncan ($9.8 billion), and California real estate mogul Walter Shorenstein ($1.1 billion). By rough calculation, their deaths in 2010 have cost the government some $6.5 billion.

Motivated by the billion-dollar estates passing to heirs tax-free, Sen. Bernard Sanders (I-VT) and four co-sponsors have introduced a bill that would return the estate tax to the 2009 exemption level of $3.5 million but add a progressive tax rate structure that would start at 45 percent, rise to a top level of 55 percent, and add a 10 percent surtax on billionaires. The proposal would be retroactive to the start of 2010.

The Responsible Estate Tax Act (S. 3533), introduced on June 24, 2010, is cosponsored by Sens. Sherrod Brown (D-OH), Al Franken (D-MN), Tom Harkin (D-IA), and Sheldon Whitehouse (D-RI). According to its sponsors, the proposal would bring in at least $264 billion over a decade while exempting 99.7 percent of Americans from paying any estate tax. The retroactivity provision would likely face a court challenge from heirs of wealthy individuals such as Steinbrenner.

“At a time when we have a record-breaking $13 trillion national debt and an unsustainable federal deficit, people who inherit multimillion- and billion-dollar estates must pay their fair share in estate taxes,” three of the senators said in a letter accompanying the bill’s release.

The year without an estate tax is a creature of the Bush tax cuts. Under the provisions of a tax-cut bill enacted in 2001, the value of estates exempt from the tax gradually went up over the past eight years while the tax rate on estates was reduced. During 2010, according to the 2001 law, the estate tax disappears entirely, only to be restored in 2011, potentially, at a rate of 55 percent on estates of $1 million or more, which is where things stood before the 2001 change.