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

In my experience, one of the most common areas of confusion in wealth and estate planning is beneficiary designations and their importance in many key areas.

Many important assets in an individual’s portfolio often pass at that person’s death by beneficiary designation and not by that person’s will or trust. Common examples of these types of assets include life insurance, retirement plans, individual retirement accounts (IRAs), and annuities. For many, these assets represent a significant portion of their overall assets, yet the beneficiary designations for these assets are sometimes not carefully considered.

Above all, it is very important to recognize that your will or revocable living trust does not control or “override” the beneficiary designations. For example, a parent’s will may direct assets to a trust for minor children if both parents are deceased. If the parent’s life insurance designation names the children directly, then the life insurance proceeds will “miss” the trust entirely, thus potentially requiring a conservatorship for the proceeds until the children reach age 18. While the children may legally be adults at age 18, they may not have sufficient maturity and experience to properly manage large sums of money (think expensive red sports cars here). The better approach would have been for the life insurance beneficiary designation to name the children’s trust as the beneficiary under the life insurance policy upon the death of the surviving parent. 

It’s also very important that you understand the tax consequences of your beneficiary designations. For example, if you designate your spouse as your beneficiary under your IRA, your spouse will be able to take advantage of a tax-free rollover of the IRA account into his or her own IRA. On the other hand, if a beneficiary other than a spouse is designated, then the beneficiary will have to take mandatory distributions from the IRA, which in turn will be subject to income taxes. In addition, while the estate tax is in currently in flux, assets passing by beneficiary designation are generally subject to the estate tax in the same manner as any other asset.

The best approach is to carefully consider and integrate beneficiary designations as part of a well-designated estate plan.

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 Late in 2009, the IRS announced that the annual gift tax exclusion will remain unchanged in 2010 at $13,000. Under the Tax Code, this amount is adjusted based upon the Consumer Price Index. The annual gift tax exclusion amount was last changed at the beginning of 2009 when the amount increased from $12,000 to $13,000. 

If a gift is less than the exclusion amount, then (i) no gift tax will be due, (ii) no gift return must be filed, and (iii) the donor’s lifetime gift-tax exemption (currently $1 million) is not reduced. This is one of the few “free Bingo spots” in the Tax Code.

The gift tax exclusion amount applies on a per-donor, per-donee basis. This means that a married couple can make gifts to a single donee equal to $26,000. For example, a married couple with two children can make gifts totaling $52,000 per year. 

For cash gifts, the amount of the gift is equal to (not surprisingly) the amount of cash given. However, for gifts of property (both real property and personal property), the value of a gift for this purpose is based upon the fair market value of the property on the date the gift is made. Often, gifts of property have significant estate planning benefits (more on these issues in a later blog article).

I welcome your comments and questions!

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On December 16, 2009, the Wall Street Journal reported that the Democrats’ attempt to extend the Federal Estate Tax exemption of $3.5 million into 2010 has been blocked by the Republicans. Senator Max Baucus is quoted as saying, “We clearly will work to do this retroactively, so that when the law is changed, it will have retroactive application.” 

The Republicans believe that the repeal should be allowed to take effect as provided under current law, and Senator John Kyl (R, Arizona) stated, “The problem doesn’t have to exist. They’ll just leave the existing law alone and let the rate go to zero, where everyone wants it anyway.”

 Thus, as the law stands today, Federal Estate Tax will be

• zero in 2010;
• with certain exceptions the tax basis step-up will be repealed for 2010;
• The estate tax exemption will return to $1,000,000 in 2011.

It is an interesting and continuing revelation about the extent of the massive gridlock in the current Congress when the Democrats could not even muster enough votes to pass a mere extension of the $3.5 million exemption for the first three months of 2010.

It remains to be seen whether or not enough votes can be mustered to make any estate tax changes in 2010. If the Senate could not pass an estate tax bill with a 60 vote majority, I am skeptical that it will get accomplished in 2010. 

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Recently, the Oregon Legislature passed a tax amnesty program with the hope of raising $16.2 million in additional revenue. (See Revenue Impact of Proposed Legislation (pdf)) The amnesty applies to corporate income and excise tax, personal income tax, inheritance tax, and transit district (self-employment) taxes. Any Oregon taxpayer with any of these underreported taxes or unfiled tax returns for any period prior to January 1, 2008 will be eligible to apply. (For a copy of the bill see SB880-B (pdf))

• Short time period: The tax amnesty program is only open for 50 days, beginning on October 1, 2009 and closing on November 19, 2009.
• Minimal Benefit: The only benefits being offered are the waiver of one half of the interest and all penalties. Not much of an incentive.
• No Taxes Waived: All the taxes due and the reduced interest must either be paid in full within 60 days of the application or be paid under an installment plan on or before May 31, 2011. Failure to complete an installment plan voids the amnesty benefits.
• Gotcha Penalty: Anyone who is eligible for this program, but fails to apply will be subject to an additional 25% penalty. This penalty can apply to tax adjustments discovered after November 19, 2009. Also any taxpayer who has received a notice of delinquency or notice of assessment from the Oregon Department of Revenue for any year that would be eligible for the amnesty program cannot participate.

This program is a "cruel joke" because:

• The amnesty program is only open for 50 days.
• The amnesty offer is minimal. There is no provision to compromise taxes.
• Anyone who is currently delinquent with Oregon taxes is probably not eligible.
• An eligible taxpayer who chooses not participate will have an additional 25% penalty added on.
• If there is a tax adjustment after the amnesty program has closed it is possible that the additional penalty can be assessed even though the tax payer was not aware of additional tax liability during the 50 day election period.

In conclusion it is hard to see that this program will help either the state of Oregon or its taxpayers.

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