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Estate Planning for Pets

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For many peo­ple, their pets are the near­est and dear­est “prop­erty” they own.  (Sorry, Fido, under law, your prop­erty, not peo­ple.  I know.  I know.)  Nonetheless, they are often over­looked or given short shrift in the estate plan­ning process.

Although pets are legally prop­erty, at least one New York court has expressed what to pet own­ers is obvi­ous: “Companion ani­mals are a spe­cial cat­e­gory of prop­erty,” not­ing also that they “are afforded many pro­tec­tions under the law” and that other courts have rec­og­nized the “cher­ished sta­tus” of com­pan­ion ani­mals.  Feger v. Warwick Animal, 59 A.D.3d 68 (2d Dept. 2007) (inter­nal cita­tions omit­ted).  (Feel bet­ter, Fido?)

The best means by far of pro­tect­ing your pets in case of your death or inca­pac­ity are prac­ti­cal rather than legal in nature.  Do you live with sev­eral other fam­ily mem­bers?  You can pre­sum­ably depend upon them to care for your ani­mal if you are inca­pable.  But if you live alone, addi­tional mea­sures may be appro­pri­ate.  Does a close friend or fam­ily mem­ber have a key to your home in case of emer­gency?  Ask that per­son to be respon­si­ble for car­ing for your pet in case of need.  If he or she for some rea­son is not the right can­di­date for the role, tell them who is, and make sure that both indi­vid­u­als are amenable to your plans.  They should have each other’s con­tact infor­ma­tion.  Does your pet have spe­cial med­ical needs or dietary restric­tions?  Type them up and stick the infor­ma­tion on your refrig­er­a­tor.  Be sure to include your veterinarian’s name, phone num­ber and address.

Another prac­ti­cal mea­sure to help safe­guard your pets’ health is to carry a lam­i­nated card which can alert emer­gency med­ical per­son­nel that pets live in your home.  Of course, the card should include any per­ti­nent names and num­bers of fam­ily or friends who can inter­cede and care for your ani­mals.  A sticker on a win­dow or door alert­ing fire­fight­ers that a pet is in the home has saved more than one pet’s life.

Next con­sider how you can pro­vide for your ani­mals in your estate plan­ning doc­u­ments.  Historically, a pop­u­lar will pro­vi­sion has been to give the ani­mal to a close friend or fam­ily mem­ber, together with suf­fi­cient funds for the indi­vid­ual to see to the pets’ needs for as long as the pets sur­vive.  Specify in the will that the money is to be used for that pur­pose.  If the first-named friend refuses to accept the pet and the money, your will may pro­vide for an alter­nate who hope­fully will be more accom­mo­dat­ing.  The friend or fam­ily mem­ber can retain any remain­ing funds once the ani­mals are no longer liv­ing.  Although this arrange­ment is not con­sid­ered legally bind­ing (your friend can spend the money as he or she wishes), it is nonethe­less a sim­ple and effec­tive tech­nique to achieve your ends, espe­cially if the named friend is informed of your wishes at the time you make your will.  Don’t sur­prise your friends with oblig­a­tions they never agreed to take on.  If you fear that your friend might neglect (or worse) your cher­ished Chocolate Point Himalayan and spend the money refur­bish­ing his kitchen, you need to be on the look­out for new friends.

Fortunately, a new and legally bind­ing means of pro­vid­ing for your pets is now avail­able in many states, includ­ing New York: the statu­tory pet trust.  New York Estates, Powers and Trusts Law § 7 – 8.1.  Under this statute, it is pos­si­ble to place money in trust expressly for your pets’ ben­e­fit.  A reli­able friend or fam­ily mem­ber can be named as trustee.  Upon the death of the last sur­viv­ing pet named in the trust, the remain­ing funds pass as you pro­vide in the trust or, if you make no such pro­vi­sion, the funds pass to your estate and are dis­posed of accord­ingly.  If you do not have com­plete faith in your trustee to carry out the terms of the trust, or sim­ply want an addi­tional safe­guard, you may appoint a sec­ond indi­vid­ual who has the power to enforce the trust terms.

One inter­est­ing aspect of the statu­tory pet trust is a court’s abil­ity to reduce the prin­ci­pal amount of the trust if the court deems it exces­sive.  Leona Helmsley, the noto­ri­ous “Queen of Mean” who inher­ited the New York City real estate empire of her hus­band, Harry Helmsley, made news even after her death by leav­ing $12 mil­lion in trust for her Maltese, Trouble.  The New York Surrogate’s Court even­tu­ally reduced that amount to $2 million.

Tax Records, Evernote and Your Paperless Life

As Tax Day rapidly approaches, per­haps you’re one of the mul­ti­tude who are fever­ishly gath­er­ing up last year’s receipts for their busi­nesses and their mort­gages and their IRAs and their char­i­ta­ble con­tri­bu­tions, many of which are scat­tered about the house (approx­i­mately) here and here and here.  Maybe you’re steel­ing your­self to dive into prepar­ing your own tax returns with the help of tax return prepa­ra­tion soft­ware.  Or you’re walk­ing sheep­ishly into your accountant’s office resolv­ing once again to deliver your records a cou­ple of weeks ear­lier next year.  Or at least to fig­ure out where they are a cou­ple of weeks earlier.

It doesn’t have to be this way.  You can be free of those shoe­boxes full of last year’s receipts and file fold­ers with copies of past years’ tax returns and the war­ranty on your new toaster oven.

Most of the records for your income tax returns can be stored dig­i­tally and the orig­i­nals destroyed.  IRS Publication 17 (“Tax Guide 2011 For Individuals”) explains among other things record-keeping require­ments for indi­vid­u­als.  In Chapter 1, p. 16, Publication 17 states as fol­lows: “The IRS does not require you to keep your records in a par­tic­u­lar way.  Keep them in a man­ner that allows you and the IRS to deter­mine your cor­rect tax.”

Electronic record-keeping is expressly authorized:

An elec­tronic stor­age sys­tem is any sys­tem for prepar­ing or keep­ing your records either by elec­tronic imag­ing or by trans­fer to an elec­tronic stor­age medium. The elec­tronic stor­age sys­tem must index, store, pre­serve, retrieve, and repro­duce the elec­tron­i­cally stored books and records in a leg­i­ble, read­able format.

The Publication con­tin­ues: “The orig­i­nal hard copy books and records may be destroyed pro­vided that the elec­tronic stor­age sys­tem has been tested to estab­lish that the hard copy books and records are being repro­duced in com­pli­ance with IRS require­ments for an elec­tronic stor­age system.…”

Reading Publication 17 together with IRS Revenue Procedure 97 – 22, which is ref­er­enced in the Publication, the sub­stance of IRS com­pli­ance seems to boil down to being able to find and repro­duce your records in leg­i­ble con­di­tion, and to have rea­son­able safe­guards in place to pre­serve the records and pre­vent any addi­tion to, dele­tion from, or mod­i­fi­ca­tion of your tax records.  Business own­ers should take a look at IRS Publication 583, “Starting a Business and Keeping Records”.

I’ve been mov­ing in the direc­tion of a paper­less exis­tence for about a year now.  “Paperless” is, of course, a rel­a­tive term.  You’ll never elim­i­nate all paper clut­ter, nor would you want to.  Some orig­i­nals must be saved, wills and promis­sory notes among them.  But you can cre­ate a space in which it’s eas­ier to focus on your pri­or­i­ties because dis­tract­ing clut­ter is reduced.  Your mind will also be more at rest because all those lean­ing and yel­low­ing stacks of unfiled doc­u­ments can now be retrieved elec­tron­i­cally by text recog­ni­tion and tag­ging far more eas­ily than paw­ing through folder after folder (or pile after pile) to extract a doc­u­ment from a phys­i­cal fil­ing system.

I use Evernote®, which is a cloud-based doc­u­ment stor­age and retrieval sys­tem.  Documents can be down­loaded directly into your Evernote® account or emailed to your account using a unique email address pro­vided by Evernote®.  Evernote® then passes your doc­u­ments through its Optical Character Recognition (OCR) soft­ware.  (Check Evernote’s® web­site to com­pare the details of their lat­est free and pre­mium ver­sions, which might include dif­fer­ent lev­els of OCR processing.)

The power of Evernote® is in its abil­ity to retrieve doc­u­ments in so many ways.  Because the doc­u­ments have been OCR’d, you can search for them by enter­ing a few key­words in the Evernote® search box.  You can boost your search effi­ciency by tag­ging doc­u­ments with key­words of your choos­ing and lim­it­ing your search results to doc­u­ments with that tag.

Documents can also be divided among any num­ber of cat­e­gories named by you.  Searching only within the cat­e­gory where you think you assigned the doc­u­ment, your results will be still nar­rower than if you had searched all of your doc­u­ments (“notes”) in Evernote®.  Categories can be used effec­tively, e.g., to iso­late all of your receipts for a given year (“2012 Receipts”) or all of your receipts of a par­tic­u­lar char­ac­ter for that year (“2012 Tax Deductible Receipts”).

For redun­dancy pur­poses, you can store your doc­u­ments both in Evernote® and on the hard drive of your com­puter, which should ide­ally itself have an exter­nal back-up drive.  If you do store doc­u­ments on your com­puter, you may wish to OCR them your­self before plac­ing them in fold­ers so that they are eas­ier to retrieve later.

The guide I read to get up-and-running quickly on Evernote® is Evernote Essentials© by Brett Kelly.  If you use the Getting Things Done® personal pro­duc­tiv­ity sys­tem, you might also take a look at Evernote®: The unof­fi­cial guide to cap­tur­ing every­thing and get­ting things done© by Daniel E. Gold.

If you decide to get seri­ous about dig­i­tiz­ing your receipts and other doc­u­ments, you’ll want to pur­chase a ded­i­cated scan­ner with a paper feeder.  If you use a flatbed scan­ner or the scan­ner in a multi-purpose printer, you will go mad.  And you will aban­don your paper­less project because your work­flow was just too much trouble.

I use the Scansnap S1500M from Fujitsu.  It’s a real work­horse.  The Scansnap line of scan­ners gets great reviews, and mine has cer­tainly per­formed well for me.

If you would like to know more about the hows and whys of a paper­less lifestyle, I sug­gest you visit a web­site that I have found very help­ful: www​.DocumentSnap​.com, founded by Brooks Duncan.  (He’s Canadian.  Don’t stare.)  His e-book, “The Unofficial Scansnap Setup Guide,” got me into an effi­cient and effec­tive ScanSnap work­flow in no time.

What’s Up With The Estate Tax?

That’s the $5 mil­lion question.

More pre­cisely, for 2012, it’s the inflation-adjusted $5,120,000 question.

If you’ve fol­lowed the wran­gling over the estate tax for the past 10 or 15 years, you know that it is a highly-charged polit­i­cal issue.  It lies directly along the fault line that sep­a­rates the anti-tax enthu­si­asts in Congress from those who believe that the wealthy aren’t pay­ing enough taxes.

The life­time exclu­sions from the fed­eral gift and estate taxes have increased con­sid­er­ably over the past sev­eral years.  As a result, for the present time at least, fed­eral gift and estate taxes have been elim­i­nated as a con­cern for the mid­dle class.  A mar­ried cou­ple may now trans­fer $10,240,000 to their chil­dren with­out pay­ing fed­eral gift or estate taxes.  I assume that to most Americans, cou­ples who have $10 mil­lion to pass along to their chil­dren aren’t exactly mid­dle class.  Others may define “mid­dle class” more broadly and argue that a cou­ple own­ing $10 mil­lion in assets is merely “com­fort­able,” but not wealthy.

In any case, whether you believe that today’s $5 mil­lion per per­son life­time exemp­tion ($10 mil­lion per mar­ried cou­ple) is too high, too low or “just right,” those fig­ures are des­tined to expire at the end of 2012.  Unless Congress acts, the gift and estate taxes will revert to the laws that were in effect in the year 2001.  That means only a $1 mil­lion per per­son ($2 mil­lion per mar­ried cou­ple) life­time exemp­tion from the fed­eral gift and estate taxes.  (The life­time exemp­tion from the third wealth trans­fer tax, the Generation-Skipping Transfer Tax (GSTT), will be a some­what larger num­ber, since the $1 mil­lion GSTT exemp­tion was indexed for infla­tion under the law in effect in 2001.)

What is espe­cially dis­con­cert­ing about the fluid state of the wealth-transfer taxes is that plan­ning to reduce or avoid the taxes is chal­leng­ing at best.  Anecdotally, many fam­i­lies have resisted updat­ing their estate plans for years, wait­ing for Congress to agree on and stick to life­time exclu­sions and tax rates (which have them­selves declined sub­stan­tially since 2001) for the gift and estate taxes and the GSTT.

A bit of his­tory is in order.  In 2001, Congress passed and President Bush signed into law the Economic Growth and Taxpayer Relief Reconciliation Act (EGTRRA).  EGTRRA grad­u­ally increased the life­time exemp­tions from the estate tax and GSTT until they reached $3.5 mil­lion in 2009.  The rates for both taxes were like­wise grad­u­ally reduced from mar­ginal rates that could reach as high as 60% for the estate tax to a max­i­mum mar­ginal rate of 45% for each tax.

Under EGTRRA, the estate tax and GSTT were slated to expire in 2010.  Because of bud­getary con­straints and Senate bud­get rules which would have required an unat­tain­able 60 votes to per­ma­nently repeal the taxes, the repeal was for one year only.  In 2011, the pre-EGTRRA taxes would be rein­stated as they existed in 2001, as though EGTRRA had never been signed into law.  The evi­dent inten­tion was that both taxes would be per­ma­nently repealed by a later and more sym­pa­thetic Congress.

EGTRRA did not repeal the fed­eral gift tax.  This omis­sion was intended to pre­vent fam­i­lies from gam­ing the sys­tem for income tax pur­poses by gift­ing assets to those best able to uti­lize the assets’ income tax attrib­utes, espe­cially unused cap­i­tal gains and losses.

Of course, there was lit­tle doubt that Congress would revisit the wealth-transfer taxes to avoid the absur­dity of a one-year repeal of the estate tax and GSTT, fol­lowed by their revival in 2011 with much lower exemp­tions and much higher tax rates than had been in place in 2009.

Congress sur­prised every­one by fail­ing to effec­tively address EGTRRA prior to 2010.  Only in December of that year did Congress act, serv­ing up a leg­isla­tive hash that gave the estates of per­sons who had died in 2010 the option of pay­ing an estate tax or pay­ing income tax on untaxed cap­i­tal gains in the decedent’s estate.  In other words, car­ry­over basis would replace the basis step-up at death.

In the 2010 tax act (the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010) (TRUIRJCA), President Obama agreed with Republican lead­ers to rein­state all three of the wealth trans­fer taxes, each with a life­time exemp­tion of $5 mil­lion (adjusted for infla­tion begin­ning in 2012) and a max­i­mum tax rate of 35%.  As indi­cated above, for 2012, the inflation-adjusted exemp­tions are set at $5,120,000.  The TRUIRJCA accord, how­ever, expires at the end of 2012.  At that time, as was the case with EGTRRA, the wealth trans­fer taxes will revert to year 2001 life­time exemp­tions and tax rates.  Will Congress finally act and give us the sta­bil­ity in the law that will per­mit American fam­i­lies to plan for reduc­ing and pay­ing the wealth trans­fer taxes?

It’s been a long road get­ting from 2001 to where we are today.  Sadly, how­ever, that’s not the fin­ish line you see up ahead; it’s the start­ing line.  We’re back to where we began, not know­ing what the law is going to be from one year to the next.


Gifts, Bequests and Basis

The Internal Revenue Code (IRC) con­tains numer­ous pro­vi­sions relat­ing to the income tax basis of prop­erty.  Touched on below are cer­tain basis pro­vi­sions that are closely inter­twined with the fed­eral gift and estate taxes.

By way of pred­i­cate, the most famil­iar type of income tax basis is prob­a­bly “cost basis” (IRC §1012).  If you have ever sold a home, you know that the price you paid for the home — its cost basis — is your ini­tial basis in the home.  If you made improve­ments to the home over the years, they were prob­a­bly required to be “cap­i­tal­ized,” or added to your home’s basis.  Absent some over­rid­ing pro­vi­sion of law (e.g., struc­tural changes to accom­mo­date a dis­abil­ity might qual­ify for the income tax med­ical deduc­tion), you were not per­mit­ted to deduct those expenses from your cur­rent income.  Instead, the income tax sys­tem took account of the cost of the improve­ments by increas­ing your basis and thereby reduc­ing your cap­i­tal gain (if any) on the even­tual sale of the home.

Moreover, IRC §121 excludes from income $250,000 ($500,000 in the case of a mar­ried cou­ple) of the gain (if any) on the taxpayer’s sale of his prin­ci­pal res­i­dence.  The exclu­sion may not be claimed more than once every two years.

The gen­eral rule for gifts, as set forth in IRC §1015, is that the recip­i­ent of a gift (the “donee”) takes the same basis in the trans­ferred prop­erty as the indi­vid­ual mak­ing the gift (the “donor”).  This is so-called “car­ry­over basis.”  On the even­tual sale of the gifted prop­erty, the donee-seller’s gain is cal­cu­lated with ref­er­ence to the basis car­ried over from the donor.

For that rea­son, it is advis­able to make gifts with as high a basis as pos­si­ble.  In this way, the gift’s value will not be unnec­es­sar­ily dimin­ished by cap­i­tal gains taxes if it is later sold.  Dollars, inci­den­tally, always have a basis equal to their face amount, in whoever’s hands they may be.

There is one impor­tant qual­i­fier to the car­ry­over basis treat­ment that usu­ally applies to gifts.  If the fair mar­ket value of the prop­erty at the time of the gift is less than the donor’s basis, then the donee’s basis for deter­min­ing loss is the lesser amount (the fair mar­ket value).  As a result, the donee’s loss (if any) when he sells the prop­erty will be less than if car­ry­over basis applied.

Under IRC §1014, prop­erty trans­ferred at death will gen­er­ally have a basis equal to its fair mar­ket value as of the date of the owner’s death.  (Alternatively, if the value of the decedent’s estate has in the aggre­gate declined on the date that is six months after the date of death, the execu­tor may elect to have the later val­ues apply.)  On the opti­mistic assump­tion (and com­mon expe­ri­ence) that prop­erty trans­ferred at death has increased in value since it was acquired by the dece­dent, the basis of each item of prop­erty will be “stepped up” to its fair mar­ket value.  As a con­se­quence, there will be less cap­i­tal gain if the item con­tin­ues to appre­ci­ate in value and is later sold.  On the con­trary, if prop­erty has declined in value since it was acquired by the dece­dent, the basis must be “stepped down” to its fair mar­ket value at death.  This, of course, results in greater cap­i­tal gain on the later sale of the property.

Technically, only per­sonal prop­erty (not real prop­erty) that passes under a Will is a “bequest.”  Although the title of this post refers to bequests specif­i­cally, the basis rules of §1014 apply to all of the prop­erty included in a decedent’s estate for fed­eral estate tax pur­poses.  Without (for the moment) dwelling on the par­tic­u­lars, a decedent’s estate may be com­posed of many types of prop­erty other than per­sonal prop­erty pass­ing under a Will.

Purchase of prop­erty = cost basis (§1012)

Gift of prop­erty = car­ry­over basis (§1015)

Bequest of prop­erty = basis step-up (§1014)

It’s Mark’s Turn to Kvetch! (My Fortnight in Internet Purgatory)

“Kvetch” is derived from the Yiddish word mean­ing “to com­plain,” but I’ve always under­stood it to con­tain an ele­ment of “to whine” as well.

As for its being my turn to whine, true, there is no offi­cial body that mon­i­tors when it’s any individual’s turn to whine or, more impor­tantly, when his whine-time has played out.  On the other hand, you may find that your friends do an excel­lent job of keep­ing track of these things infor­mally.  I’ve noticed, how­ever, that my friends seem to focus unduly on the back end, or when my time to kvetch is over.

I’ve been work­ing pretty hard (if I may say so) on this web­site and the many other steps nec­es­sary to launch a largely Web-based prac­tice of law.  Ethical issues, includ­ing how to pre­serve client con­fi­den­tial­ity online, are numer­ous and com­plex.  But that’s just life in the 21st cen­tury.  The Internet, it seems, has only begun to shape our lives and careers.

Be that as it may, I am a lawyer, not a techie.  But, being a lawyer, I fig­ured that of course I had the smarts and whatever-else-it-might-take to put together a web­site, mean­while know­ing noth­ing of HTML, CSS or PHP.

In fact, it is now pos­si­ble using tem­plates or “themes” to build a web­site with­out know­ing much at all in the way of cod­ing.  I know this to be true because I did it myself!  And then I did it again!  But I con­fess I’d lost some of my enthu­si­asm the sec­ond time around.

I sup­pose it’s a spe­cial appli­ca­tion of Murphy’s Law that the greater the effort expended, the later in time will Murphy’s Law come into effect.  In this way, the frus­tra­tion and dis­ap­point­ment expe­ri­enced at the even­tual crash are amplified.

So I guess it was inevitable that in try­ing to add one final and essen­tial detail to my web­site — my con­tact information! — I blew up the site.  Not derailed it, or messed it up, or made a goof.  No, I demol­ished it.  Couldn’t even get back into the site to try to repair it.  My hope was that my web­site host could roll the site back a day or two to a stage before my lat­est “enhance­ments.”  Even if they couldn’t, I rea­soned, the site would at least be a lot eas­ier to rebuild than it was putting it together the first time.

Well, I’ve rebuilt, but I’m not so sure it was eas­ier the sec­ond time.

If you’re think­ing of cre­at­ing a web­site, give some thought to hav­ing a pro­fes­sional do it for you.  Even then, you will still need to work through how you want the site to look, what pages you want, and how it will all be linked together.  And you should make sure that the pro­fes­sional gives you ade­quate train­ing so that you can main­tain the web­site once he’s left the scene.  There are also third par­ties who will main­tain your web­site for a fee.

Oh, and first thing, install a plug-in that will let you roll back your site to a pre-disaster state.  I repeat, the very first thing.

I chose iPage to host my site, and I’ve had a good expe­ri­ence with them.  However, they didn’t man­age to roll back my web­site to a pre-kaboom state owing to delays on their end.  I liked that iPage is a green com­pany, oper­ated by wind power.  I also thought the prices were fair.  Be aware, though, that you will end up spend­ing much more for var­i­ous ser­vices than the teaser rates shown on the front page of the web­site would sug­gest.  But my impres­sion is that the “teaser” busi­ness model is com­mon in the web host­ing sector.

There are many, many web hosts avail­able, and many hosts that have a devoted following.

Finally, I couldn’t have done bet­ter than choose thel​o​go​com​pany​.net for the design of two logos and related sta­tionery.  The design work was of very high qual­ity, and their turn­around time, even on the ini­tial designs, was pretty reli­ably a mere one or two days.  Their prices are sur­pris­ing low.

Next time, the rela­tion­ship between gifts and basis.