Wealth Law Blog : Oregon Asset Protection Lawyers & Attorneys : Samuels Yoelin Kantor Seymour & Spinrad Law Firm : OR Estate Planning, Fiduciary Litigation

Often free internet advice on Do It Yourself ("DIY") professional matters is worth exactly what you pay for it:  nothing.  The internet has changed the way we interact with each other, the way we shop, and the way we manage our lives. Search tools like Google and Bing now steer users to millions of web pages, some of which contain “professional” advice on everything from medicine to law.  

One of these sites that provides an online database of legal forms was recently investigated by the Attorney General in the State of Washington.  This investigation was settled and the parties signed an Assurance of Discontinuance (pdf) on September 1, 2010. The Assurance highlights some of the pitfalls people should look out for when preparing their own legal documents online.

Article II of the Assurance lists the acts which the Attorney General determined were “unfair or deceptive acts or practices and unfair methods of competition in violation of 19.86.020 RCW”. These acts include the following:

• Failing to offer estate planning legal forms in Washington that conform to Washington law.
• Failing to clearly disclose that communications between the provider and Washington consumers are not protected by the attorney-client or work product privilege.
• Comparing service costs with those of an attorney without disclosing to Washington consumers the fact that the provider was not a law firm.
• Misrepresenting the costs, complexity and time required to probate an estate in Washington.
• Misrepresenting the benefits or disadvantages in comparing estate distribution documents in Washington.
• Failing to comply with 19.295 RCW (the statute dealing with estate distribution documents).
• Engaging in the unauthorized practice of law by providing legal advice about self-help documents.

While the Assurance notes that it is not to be considered an admission by the provider and that it “shall not be considered a finding of wrongdoing,” the document does effectively spell out some of the questions individuals should be thinking about when preparing their own legal documents:

1. Do you have all of the correct forms?  Many online law providers are not allowed to direct readers to particular or necessary forms.
2. Do the documents comply with all of the laws for the relevant state(s)?  If you've got property or assets in more than one state, this is important. 
3. Is there sensitive information that the individual would rather keep confidential?
4. How complex will the implementation of the documents be.  For example, what will probate cost? 
5. What will the process ultimately cost?  If future litigation blows up because the forms are defective or insufficient, your estate and/or your beneficiaries will pay the price. 

You've heard these warnings before: "If it's too good to be true......" or "an attorney who represents himself has a fool for a client."   The same cautionary advice holds true for those who opt to prepare their own legal forms using an online service.  While some may be able to use these services to prepare inexpensive legal documents, the costs associated with enacting these documents and the opportunity for error can be significant.

Finally, if an attorney commits an error in preparing legal documents, the attorney is covered by malpractice insurance (or should be - some states demand mandatory insurance while others do not), but no such protection exists for those that prepare their own documents. 

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Last month, in a rare moment of bipartisan compromise and with (by Congressional standards) blazing speed, Congress and President Obama came together and passed a sweeping tax package, more formally known as the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. President Obama signed the Act into law on December 17, 2010. The following is a brief summary of the key provisions of the Act:

Current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35%.

Capital gains and qualified dividends will continue to be taxed at a top rate of 15% through 2012.

Social security payroll taxes for employees and self-employed workers (which include partners whose incomes are subject to payroll taxes) will receive a reduction in Social Security payroll taxes in 2011, with the “employee-side” rate being reduced from 6.2% to 4.2%. 

An AMT “patch” for 2010 and 2011 will keep the the alternative minimum tax exemption near current levels.

Itemized deductions of higher-income taxpayers will not be reduced. Without this provision, itemized deductions would have been reduced by 3% of adjusted gross income above an inflation-adjusted figure, but the reduction couldn't exceed 80%.

Tax-free distributions from IRAs to charities are retained for 2011 only. This provision allows taxpayers age 70 1/2 or older to make distributions of up to $100,000 from their Individual Retirement Accounts (IRAs) to charities. In addition, individuals will be allowed to treat IRA transfers to charities during January of 2011 and as if made during 2010).

Businesses expensing equal to 100% will be permitted on the cost of a business’ purchase of equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.

Estate taxes are reinstated for 2011 and 2012, with an exemption of $5 million per person and a top rate of 35%. Estates of people who died in 2010 can elect to follow the estate tax rules of either 2010 (no estate tax, but with a “carryover” of a decedent's tax basis) or 2011 (estate tax with a full “step-up” in tax basis to an asset’s fair market value at the decedent’s date of death).

The Gift Tax Exemption was $1 million prior to 2011. With this lower exemption, if a taxpayer’s cumulative lifetime gifts exceeded this $1 million mark, then they would be required to pay gift taxes. Now, the has be “re-unified” with the estate tax, meaning that the current gift tax exemption is the same amount as the estate tax exemption – i.e. $5 million. Like the changes which the Act makes to the estate tax, this change expires at the end of 2012. This means that for 2011 and 2012, taxpayers have an unprecedented opportunity to make larger estate-planning gifts without paying gift taxes.

“Portability” is the latest buzzword for the estate tax.  New provisions in the Act allows surviving spouses to add their deceased spouses unused estate tax exemption to their own, potentially allowing the surviving spouse to ultimately have $10 million of estate tax exemption. However, this new provision may have limited application. First, the provision will only apply if the first spouse dies after January 1, 2011 and the second spouse dies before December 31, 2012. While Congress may extend this provision, that result is far from certain. Second, the exemption will be lost if the surviving spouse remarries and survives his or her next spouse. Ultimately, we suggest that the traditional use of a “bypass trust” continue to be the first line of defense against the estate tax.

While the new tax bill certainly has benefits to taxpayers and does provide some planning opportunities, because of the fleeting nature of many of the provisions in the bill, planning around some of the bill’s provisions will be a somewhat precarious process. 

The new Congress is already discussing additional “tax reform.” Stay tuned! 

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Kudos to Hugh Hefner. In case you haven’t heard, the 84 year old entrepreneur just announced his engagement to an attractive 24 year old. Now, I know you presume that this is the natural outcome when two people fall in love, but I suspect there may be ulterior motives.

We all know that Hugh is, from all appearances, a pretty wealthy guy. I can only conclude from this most recent nuptial announcement that he is also an incredibly gifted tax planner.

I am not sure the ink was even dry on the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 before the perennial purveyor of porn jumped into action. You see, included in Congress’s extension of the Bush tax cuts was a brand new provision in the estate tax law dealing with “portability” of the estate tax exemption. Beginning in the year 2011, the estate tax exemption increases to $5 million. In addition, the executor of a decedent’s estate can elect to transfer his or her remaining $5 million exemption to his or her surviving spouse.

Hugh gets his own $5 million exemption. We all know how young and spry he is, and based upon his lifestyle, we can only presume that Hugh thinks he is going to live to age 150. His naïve yet enchanting young wife, who has never been faced with the pressure of modern day life being married to a multi-millionaire, may well succumb to the physical stress of the relationship and meet an untimely demise during either 2011 or 2012. If this is the case, Hugh will be entitled not only to his own $5 million estate tax exemption, but to the exemption of his recently deceased spouse as well. Brilliant!

This creative tax reduction “technique” provides a unique new market for the acquisition of “portable estate tax exemptions.” Let’s presume, for a moment, that we have a wealthy unmarried client (call her “Ms. A”) with no foreseeable intent to marry in the future. We explain to Ms. A that if she agrees to marry someone, and if her new husband then predeceases Ms. A, she could receive the benefit of her deceased husband’s unused $5 million estate tax exemption. Ms. A decides that this is worth looking into, so we find a lost soul with no assets, no reasonable life expectancy, and the need for some quick cash. Ms. A and her intended “spouse” would enter into a premarital agreement providing that he waives all claims against Ms. A’s estate, agrees to accept no support from Ms. A and agrees never to communicate with Ms. A again (even though the marriage would last “until death do us part”). Ms. A could then create a trust providing for monthly nominal payments to the new husband during his lifetime (an inter-vivos QTIP). The husband would agree under the prenup to sign a will giving his $5 million estate tax exemption to Ms. A.. At the new husband’s death, the trust would revert back to Ms. A or her intended beneficiaries.

What a plan! This would give Ms. A an additional $5 million of exemption to use in connection with gifts to children or other intended beneficiaries, resulting in a $1,750,000 tax reduction at her death.

If you think this whole arrangement might be comical, let me tell you what’s really comical: Congress thought that portability meant simplification, but instead they created a new quagmire and more confusion among tax advisors. When will they learn?
 

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