2010 Tax Relief / Job Creation Act: Changes to Federal Tax Law Affecting Estate Planning

The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act" signed into law by President Obama last week which affected a number of tax code provisions.  I drafted this summary to provide a brief, non-tedious, and "legalese" free overview of some of the major changes affecting estate planning involving estate and gift taxes.  Please note there are nuances and caveats to the examples given below as well as other provisions not mentioned.

Under the new law, the estate tax is only applicable to assets of a decedent that exceed $5 million dollars which are then taxed at a rate of 35%.  For example, beginning next year an individual’s estate of $6 million is eligible to have the first $5 million exempt from taxes while the remaining $1 million is taxed at 35% (a $350,000 potential tax liability).

The gift tax exemption rate is also $5 million dollars with a tax rate of 35% of any gifts over the exemption.  For example, once an individual gives away more than $5 million dollars during their lifetime, they will need to pay a tax of 35% on amounts gifted over $5 million.  The estate and gift taxes are also part of a unified system.  This means that the estate of an individual that has exceeded the $5 million dollar gift exemption during the lifetime of the decedent will be taxed at a rate of 35% on all assets.

Finally the more obscure generation-skipping transfer (GST) tax will also have a $5 million dollar exemption with a 35% tax rate for assets over the exemption amount.  The GST is another layer of taxation in addition to estate and gift taxes, but is only is applicable when a transfer is made to a person who is two or more generations younger than the donor.

One interesting aspect to the new law is that of the “portability” of the federal estate tax exemption between married couples.  In the past, estate planners would often draft two trusts for a couple in order to take advantage of each spouse’s exemption.  For example, a married couple in 2009 would each have a $3.5 million dollar exemption.  Without a trust for each individual, at the death of the first spouse all of the assets would transfer to the surviving spouse which would mean a loss of the decedent’s exemption.  By drafting a trust for each spouse, a couple would be able to take advantage of a combined exemption of $7 million dollars by placing half of the assets in one spouse’s trust and the other half in the other spouse’s trust.  Under the new portability provision, married couples could conceivably only have one trust and enjoy a combined exemption of $10 million.

Now that you’ve read all this you should know very few estates are subject to estate taxes.  In 2009 when the exemption was $3.5 million, it was estimated that only .3% of estates were subject to the estate tax – that’s 1 in 333 estates.  Also, the changes that were passed into law last week are only in effect for the next two years and beginning in 2013 the estate and gift tax exemption will return to $1 million and a tax rate of 55%.

Although the majority of individuals and couples are not subject to the federal estate tax, there is still a strong need to have an estate plan in place.  Trusts still offer a number of benefits other than tax planning including creditor protection, privacy, and control over assets, as well as all the other benefits that go along with a comprehensive estate plan (appointment of a guardian for children, succession planning for family businesses, charitable giving, etc.).  It is also worth pointing out that in two years we do not know what the estate and gift tax exemptions will be so having a well drafted estate plan in place is ever more important.

For a comprehensive summary of the entire Act, CCH has a pretty good overview and analysis of all the various parts (PDF - 10 pages).

David John was born on June 17, 2010 @ 10:54 PM,  weighing 9 lbs 1 oz, at a length of 22 1/2”.

David John was born on June 17, 2010 @ 10:54 PM, weighing 9 lbs 1 oz, at a length of 22 1/2”.

The (Slow) Adoption of Electronic Signatures

I recently came across an article on the Lawyerist discussing Adobe’s online application called eSignatures (currently in beta) which facilitates the signing of electronic documents over a web interface.  In other words, no human hand will touch the document for signing.  At first I was excited for Adobe’s product since it appeared to make the electronic signing of documents easier.  But unfortunately there are still a number of hoops to jump through using Adobe’s product thereby frustrating what should be as simple as picking up a piece of paper and signing your name.

The concept of electronic signatures is not that new.  The federal ESIGN Act was signed into law in 2000 and a year before that the Uniform Electronic Transaction Act (UETA) was approved by the National Conference of Commissioners on Uniform State Laws and adopted in almost every U.S. state (apparently Illinois, New York, and Washington aren’t sure the internet is going to be around long enough to make passing UETA worth while).  These laws have enabled individuals and businesses to enter into agreements by electronic means but use of electronic signatures has been slow.

We enter into transactions requiring electronic signatures all the time; whether it is from purchasing goods online or accepting insurance policy changes by clicking an “I Agree” button in your browser.  However, excluding internet commerce, the use of electronic signatures is not as prevalent.  Why?  The primary reason has to do with human nature.  We generally don’t like change and the idea of signing your name using keystrokes or entering into a binding agreement by a mouse click just doesn’t seem natural.

Another reason for the lack of progress, is that software vendors and other commercial entities complicate the process and force you to use their proprietary format.  We’ve all see the feature in Adobe Acrobat and Reader that allows you to electronically sign a document or other products that rely on a key verfication process.  These processes frustrate the adoption of electronic signatures since they do not involve an intuitive process and generally relegate you to using a single proprietary standard or product.  Why would anyone want to go through 10 or 20 different steps to electronically sign a document when the alternative takes two seconds?

Under most state laws there is no requirement for the convoluted and involved processes that software vendors would like you to believe.  For example, take the State of Michigan which has adopted UETA (Act 305 of 2000; MCL 450.831 - .849).  Under UETA, an electronic signature is defined as “an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record” (MCL 450.832(h); UETA § 2(8)).  In other words, whatever the signer adopts or uses in signing an electronic record it will be recognized as a legally valid signature.  There are other legal requirements under UETA, such as document retention and allowing the signor to print or store the signed document, but in general the law is very straight forward.

Software vendors and troglodytes will raise the question of how do you verify that the person behind the signature is actually the person who should be electronically signing the document.  The answer is the same way you would with a written signature — based on surrounding circumstances.  Let’s look at the following example.  An attorney sends a client an engagement letter either by mail or by fax.  Once the signed engagement letter is received from the client, how does that attorney know it’s really the signature of the intended person?  Because a postal address or a fax number are forms of verification.  The attorney may have previously mailed or faxed documents to that person and received a response or other confirmation thereby trusting the mode of delivery.  Or if it is a new client, the attorney will verify that the address or fax number is associated with the intended recipient.

The same is true for communications over the internet.  Using the same example as above, an attorney emails a client an engagement letter in PDF format for the client to complete.  The client reviews the engagement letter, types in the date and name in the form-fields, saves it to their hard drive, and emails it back to the attorney.  The authentication or signing of the document was completed upon the client typing the name, and verification was achieved twice when the attorney emailed it to the client and the client emailed it back.  Now the attorney has a record of the transmission identifying the electronically signed document including email header information.  Additional information could be obtained from the internet service providers for the attorney and the client if the contract ever became the center of litigation.

As I continue to become less paper dependent in my effort to practice law in a completely digital environment, using electronic signatures simply make sense.  Electronic signatures avoids delay in waiting for the return of a signed document, saves on the cost of postage as well as the cost of paper and envelopes, and saves on storage costs and time spent trying to retrieve a document.

In the coming week or two I hope to talk about best practices in implementing and standardizing electronic signatures in a business environment.  In the meantime, feel free to share your thoughts and experiences on the topic of electronic signatures.

Twitter and LinkedIn for Blackberry

This is the week for new Blackberry applications.

Twitter released its own software for Blackberry late last week.  Various tech media outlets are reporting that this may create some bad blood between Twitter and third-party developers.  Honestly, many of the third-party apps out there are deficient so software developed by Twitter is more than welcome.  Maybe this will cause those third-party developers to step-up to the plate and create more robust and stable Twitter applications.

LinkedIn finally has released their Blackberry software for accessing LinkedIn.  I’ve been looking forward to this software as the LinkedIn mobile version of the website is sorely lacking in usability and Blackberry applications are nill.

Here are links to my Twitter page and LinkedIn profile if you’re interested in following or connecting with me.

Late update: Just after I pressed publish for this entry, I was taken to my Tumblr dashboard which announced a new Blackberry application for posting to Tumblr

Talk about Blackberry app overload.