Federal Estate Tax Exemption Continues as Guessing Game

Get ready because estate taxes are about to change. Again. Perhaps dramatically.

Over  the years, federal estate tax exemptions have consistently been  inconsistent. In 2001 for example, the exemption was $675,000 – meaning  that every dollar more than $675,000 inherited from a non-spouse would  be subject to the tax. The exemption steadily increased each year, up  to $3.5 million in 2009, and then in 2010 there was no estate tax – the  exemption was unlimited. However, there was a catch: the exemption was  set to sunset, lowering to $1 million in 2011.

Just  days before that was about to happen, Congress stepped in and passed the  Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation  Act of 2010, which increased the estate tax exemption to $5 million.  This meant that any estate worth less than $5 million would be exempt  from the federal estate tax. (At the same time Congress also increased  the gift tax exemption, which is the amount someone can gift tax-free  over his/her lifetime, and lowered the marginal gift and estate tax rate from 55 percent to 35 percent.)

Again,  there was a catch: the $5 million exemption that is now in effect,  will sunset on Dec. 31, 2012. Unless Congress passes a new law, the  estate tax exemption will lower to $1 million on Jan. 1, 2013 (and  the marginal estate tax rate will increase back to 55 percent).

The  last time Congress was faced with an estate tax exemption about to  expire – the end of 2010 – it increased the exemption, albeit for only  two years. That time, the mid-term elections had passed, and Barack  Obama was two years into his presidency.

This time, while we wait to see what Congress does, congressional elections and the  presidential election are fast approaching. Estate taxes will likely  be one of many campaign issues, although there has been little  discussion about it in Congress to date. And the presidential  candidates have made little mention of it either, making a lot of folks  nervous that Congress will allow the $5 million exemption to expire, in  favor of the $1 million exemption.

The  wealthiest few – figuring that Congress won’t extend the $5 million  exemption and 35 percent estate tax rate – have already taken advantage and  made substantial tax free gifts in order to lower the value of their  estate.

For  the other 99.9 percent for whom gifting may not be so wise, things are  complicated because nobody knows what Congress will do. If Congress  votes to renew the current scheme, then nothing will have changed. On  the other hand, if Congress does nothing, and the exemption sunsets to  $1 million, a substantial number of inheritances will then become  subject to the tax. The other possibility – the more likely scenario –  is that Congress compromises and sets the exemption somewhere between $1  million and $5 million. That scenario will affect some estates, but  not others. But until that happens, taxpayers are left scratching their  heads wondering what it will be—and how to plan for the unknown.

Caselaw Update: Court Addresses Undue Influence in Estate of Melter

Estate of Melter, 167 Wn. App. 285, 273 P.3d 991 (2012) is an interesting case, well authored by both the majority, and the separate concurrence.  It’s a must read for Washington trust and estate lawyers.  We think it is important because it addresses one beneficiary’s confidential relationship with the decedent and how that can affect his (or his opponent’s) burden of production and proof in a will contest where undue influence is alleged.

The case is also important in that it emphasizes testamentary capacity as an important factor in distinguishing mere influence, which is nugatory, from undue influence, which is consequential.  Here are the basic facts: Continue reading

Federal Judge Strikes Down Portion of DOMA in Estate Tax Case

Yesterday a federal judge ruled that a critical section of the Defense of Marriage Act (DOMA) unconstitutionally discriminates against married same-sex couples. Here’s the opinion.  And here’s the story:

Edie Windsor and Thea Spyer lived as a couple in New York City for 44 years. They were engaged in 1967, a couple of years after becoming a couple, and married in Canada in May, 2007. Thea died two years later.

The IRS did not recognize the marriage and taxed Edie’s inheritance from Thea (which would not happen if they were husband and wife). Ordinarily, whether a couple is “married” for federal tax purposes depends on  whether they are married in the state they reside. The State of New York recognized Edie and Thea’s marriage, but under DOMA, the federal government refuses to treat married same-sex couples the same way as other married couples.

Edie sued under the Equal Protection Clause of the Fifth Amendment to the Constitution… And won, at least at the trial court level.

Section 3 of DOMA codifies the non-recognition of same-sex marriage for all federal purposes, including insurance benefits for government employees, Social Security survivors’ benefits, and the filing of joint tax returns.

Edie argued that Section 3 denied her equal protection, because she was gay, married to a woman, but not allowed the same tax treatment she would have if she were married to a man.

The court declined Edie’s invitation to make gays and lesbians a “suspect class” which would have required the court to strike down the law absent compelling circumstances justifying it, which rarely present.  Instead, the court gave it the lowest level of review is “rational review,” which means that if a rational basis for the law is conceivable, the law will be sustained as constitutional, even if it applies unequally.

Under the lowest standard of review, the court still held DOMA’s Section 3 violates the Fifth Amendment’s Equal Protection Clause.

BECU v. Burns: Banks Can Sue First, Foreclose Later.

Does entry of a judgment on a promissory note extinguish the lien of a security interest in real property that secures that note?  No, says Division 1 of the Washington Court of Appeals.

In BECU v. Burns, Boeing Employees’ Credit Union won judgment on a second position promissory note.  When the first position lender foreclosed, there were surplus funds available after the trustee’s sale.  The Superior Court said those funds belonged to the Burns.  BECU appealed.

The issue in Burns was whether BECU received the surplus funds as a second position lienholder, or whether the homestead exemption allowed Burns to take the homestead amount, $125,000, ahead of BECU.  In other words, by opting to sue on the note, and get judgment, did BECU give up its status as a consensual lienholder (who would be superior to the owner’s homestead exemption), and become an ordinary judgment lienholder (who is inferior to the homestead exemption)?  No, says the Court of Appeals.

Burns also answers a different question, that TEP thinks is far more important.  The question is this:  May I obtain judgment on a promissory note, levy upon other non-secured assets (to satisfy the judgment), and then later foreclose on the deed of trust, nonjudicially?  The answer is Yes!

In American Federal Savings & Loan v. McCaffrey,  107 Wn.2d 181, 728 P.2d 155 (1986), the Washington Supreme Court said:

“In transactions involving both notes and mortgages, the notes represent the debts, the mortgages security for payment of the debts. Either may be the basis of an action. The mortgagee may sue and obtain a judgment upon the notes and enforce it by levy upon any property of the debtor. If the judgment is not satisfied in this manner, the mortgagee still can foreclose on the mortgaged property to collect the balance.” (Emphasis added.)

Absent in the McCaffrey opinion is any explanation as to whether the “still can foreclose” language is limited to judicial foreclosures (a judgment holder can always judicially foreclose on his lien) or whether one can later nonjudicially foreclose on the mortgage lien.

Burns answers that question, albeit in dicta.  According to the Burns case, a noteholder can sue, win judgment, levy on other assets, and then nonjudicially foreclose on the collateral.

It will be interesting to see how many banks take this route – sue first, foreclose later.  If they do, we may see a lot of borrowers who can afford their mortgage thinking twice about simply letting the property go to foreclosure.

Is a Sales Tax Really Regressive?

Washington  is one of the few states that does not have an income tax. Instead, it has a hefty sales tax. Every few years politicians dust  off the old state income tax playbook and try to sell it to voters as an  alternative to the sales tax.

The  last time this happened was 2010, when we voted on I-1098, which was a  voter initiative to lower real property taxes, eliminate the B&O tax  (a tax that businesses pay), and impose a state income tax. Voters resoundingly rejected it.

Proponents  of I-1098 argued (among other things) that the sales tax is  “regressive,” meaning that it hurts poor people more than rich people.  But when measuring who is poor and who is rich across an entire  population – in order to argue whether a tax is fair – it gets complicated  quickly. Continue reading

Hooray for Prenuptial Agreements!

Most people think of prenuptial agreements as something rich men use to keep their assets from falling prey to their new, less wealthy (and usually younger) wives — the gold-diggers.

Others see it as a sign of mistrust. If you need a
prenuptial agreement, you must not trust your future spouse.

I see it differently.

When I married my wife, neither of us had assets to protect, so our agreement was not about protecting assets. Rather, it was about what in our relationship we would value and how we would value it. We committed it to writing because memories fade over time and because we are both lawyers.

Click here to read more.