Today's Law: Estate Tax Reform, Reforming Separation Agreements, Citizenship
March 21, 2011
by Forsyth & Forsyth
Newsletter for clients of Forsyth & Forsyth March 21, 2011 No 95
Estate Tax Reform
Last December Congress passed the Tax Reform Act of 2010. The biggest change, which was not really a reform, was the continuation for two years of the income tax cuts enacted early in the administration of George W. Bush. Congress and the President will have to revisit the issue before December 31, 2012.
Congress did tinker with the estate and gift tax laws. Starting this year, you can give away, during your life or at death, $5 million of property to any person other than a spouse or a charity without paying any federal transfer tax. As before, there is no dollar limit on gifts to a spouse or a charity. In 2009 the cap was $3.5 million per person.
Besides increasing the exempt amount, Congress also made the amount portable between spouses. This means that if you own $2 million of property and leave it all to your spouse upon your death, he “inherits” the unused portion of your exempt amount or the full $5 million. During his life or at death he can give away $10 million without paying any federal transfer tax.
The portability of the exempt amount eliminates the task of dividing assets between you and your spouse during your lives. The division was necessary to assure that each of you died owning property that could be sheltered by the old exempt amount.
For most clients these changes should not require any changes to their estate plans. If you are single, you now have the benefit of a $5 million exemption. If you are married, you probably have a plan that leaves all of your property to your surviving spouse. In your will you give him the option of keeping the property or disclaiming part or all of it. Any amount disclaimed will pass to a trust of which he is the primary beneficiary. The assets in the trust will pass to your children upon his death, free of federal transfer tax.
The portability of the exempt amount may make it less likely that your spouse will disclaim. He can decide when you die. The trust is still good because it injects flexibility into your estate plan.
A few wills, drafted long ago or by another office, may contain a trust for the surviving spouse to be funded by a dollar amount. The amount is actually a formula tied to the exempt amount available at death. These wills could pose a problem in light of the changes in the law and should be reviewed.
New York State has not changed its estate tax law and is not likely to do so. Its exempt amount is $1 million. If you die owning $2 million without a spouse, your estate will pay the state $99,600 in estate tax. At $5 million your estate will pay the state $396,000. An estate plan with a disclaimer trust may save part or all of this tax.
The time to create an estate plan with a disclaimer trust is when you are married. Single persons do not realize any savings if they set up the trust.
Reforming Separation Agreements
A separation agreement is considered a contract. Once it is signed and the divorce becomes final, courts are very reluctant to open up the agreement and change the terms of the bargain. Public policy favors finality in divorce cases.
But what if both parties labored under a mutual mistake of fact in their negotiations and the fact was of gigantic proportions? Such was the situation in a recent divorce involving a partner at a large New York City law firm. He invested millions with Bernie Madoff.
For purposes of the divorce he valued the investment at $5.4 million. He credited his wife with half and paid her a total of $6 million to induce her to sign a separation agreement in 2006. He liquidated part of the account to pay her.
When he discovered that Madoff was running a Ponzi scheme and that his account was worthless, he brought suit to reform the agreement and direct his ex-wife to return an unspecified portion of the $6 million to him. The lower court threw out the suit but, surprisingly, an appellate court reversed, sending the case to trial.
At the trial the ex-husband will have to prove that the mistake was mutual and was “a fundamental assumption of the contract.” The proof “must be of the highest order and must show clearly and beyond doubt that there has been a mistake.”
Two appellate judges dissented. They cited the huge proof problems awaiting the ex-husband. Although the Madoff account was supposedly the couple’s largest asset, the agreement does not mention it by name and does not specify how he was to pay her the lump sum. The agreement does address the division of other assets, such as the Manhattan apartment and the parties’ retirement accounts.
The agreement contains a clause merging all previous statements of the parties into the agreement. This means that if a statement is not repeated in the agreement, the statement has no force or effect.
The appellate court probably acted the way it did because of the magnitude of the loss and the notoriety of Madoff.
Many are making political hay of undocumented aliens or “illegal immigrants.” One issue drawing attention is the right of children of such aliens born in the country to be citizens.
I say right because the 14th Amendment speaks very clearly on the issue. “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens.”
Several law professors and attorney generals believe that the “subject to” language limits the grant of citizenship. They are right but not in the way they wish.
In 1898 the Supreme Court construed the language in light of English common law on who owed allegiance to the King and who was entitled to his protection. Everybody “within the kingdom,” including aliens, qualified, with the exception of children born of foreign diplomats and hostile soldiers.
The next time you hear somebody assert that being a citizen “is what’s in our souls,” remind him of the 14th Amendment.
If you have any questions about tax reform, separation agreements, constitutional rights or any other matter, please contact us.
FORSYTH & FORSYTH
16 W. Main Street, Suite 110
Rochester, NY 14614