Repeal of the Federal Estate Tax and Carry-Over Basis

Repeal of the Estate Tax for 2010

            Despite our assertion that Congress would never allow a repeal of the estate tax in 2010, we find ourselves in the last quarter of 2010 with just that- no estate tax.  Further, in 2010, there is also no Generation Skipping Tax (“GST”). Unless Congress acts prior to the end of 2010, both the federal estate tax and GST will be reinstated as of January 1, 2011 with an exemption of $1,000,000 per person and a 55% rate of tax.  It should be noted, however, that any applicable state estate tax is still in full force and effect in 2010.  In addition to the major impact of the repeal of the federal estate tax and GST, 2010 brings about several other tax consequences that could impact one’s estate plan.  These will be discussed in greater detail below.

            Although there is still a federal gift tax for gifts exceeding a donor’s $1,000,000 lifetime exemption, the gift tax rate is reduced to 35% in 2010 from 45% in 2009.    

            More significantly, as of January 1, 2010, the “stepped-up basis” rule which applied pre-2010 (property acquired from a decedent through an inheritance was given a new basis of fair market value as of the decedent’s date of death), was replaced with the “carryover basis” rule in 2010.  The new set of rules means that property acquired from a decedent through inheritance will retain the decedent’s tax basis in the hand of the beneficiary, which would most likely result in capital gain when the beneficiary sells the inherited property.  However, there are exceptions to the carryover basis which could help ease the burden of the new set of rules.  First, the new rule permits an increase of up to $1,300,000 in the basis of certain assets owned by the decedent.  Second, there is an increase of up to an additional $3,000,000 in the basis of property passing to the decedent’s surviving spouse. 

            There are certain requirements to the basis adjustment rules outlined in the foregoing.  For example, none of the decedent’s assets may have a basis adjusted above fair market value.  Further, the Executor, in his/her sole discretion, elects which assets are to receive the basis adjustment.  Finally, there is an additional tax return required to be filed for the allocation of the basis adjustment to property acquired from a decedent, if the fair market value of the property exceeds $1,300,000 or if the decedent acquired property by gift, except in certain cases.  This form is due with the decedent’s final income tax return.

            The repeal of the estate tax is not as good as it might have seemed due to the additional filings and taxes.  Moreover, a sunset back to $1,000,000 applicable exclusion amount in 2011 with a 55% tax is even less desirable.  Please feel free to contact us for more information and to talk about addressing these changes.

Nicole E. Russak, Esq.

AFFORDABLE HOUSING IN NEW JERSEY

AFFORDABLE HOUSING IN NEW JERSEY

We are waiting for the New Jersey Assembly to act on the Senate Bill which will abolish the New Jersey Council on Affordable Housing (COAH).  Perhaps one of the only silver linings that comes out of this recession and the slow down of residential development, is the fact that hardly anyone notices that no one knows what to do with affordable housing.  Property owners, developers, towns and state employees alike, cannot be certain as to what the affordable housing requirements will be for any residential development in the State.  Unfortunately, if this does not get resolved soon, it will be another factor in the slow economic recovery that we are going through here in New Jersey.

 The Senate Bill, S-1, abolishes COAH and seeks to move the affordable housing obligations to the local level, town by town.  Who knows if this will work?

 A popular misconception is that the abolition of COAH serves to abolish the obligation to provide affordable housing in New Jersey.  This obligation does not go away easily.  It is a constitutional mandate as determined through a long history of New Jersey Supreme Court decisions.

 If the current economic climate continues to deteriorate, then we will never be able to create affordable housing, because no one will be able to buy or rent at any price!  You should expect the Senate to pass a bill similar to the one that passed the Assembly.  As long as the housing industry is starting over, it may as well have new rules for affordable housing.

Stuart D. Liebman, Esq.

HEALTH CARE REFORM SERIES – PART 2

Health Care Reform – Additional Tax on High Income Earners

 By: Jill F. Rosenfeld, Esq.

 Part 2 – New Tax on Investment Income.

 Beginning in 2013, a new 3.8% tax will be assessed on investment income earned by individuals who are assessed the 0.9% increase on wages discussed in Part 1 of this series (i.e,. thresholds of $250,000 for married filing jointly, $200,000 for singles and $125,000 for those married filing separately). Investment income includes interest (except municipal bond interest), dividends, rents, royalties, capital gains on sales of investment instruments and bonds, taxable portion of insurance annuity payouts (unless from company pension), passive income from rents and businesses the taxpayer does not actively participate in and taxable gain on the sale of a home over the $500,000 exclusion ($250,000 for single filers).

 For example: if a married couple has Adjusted Gross Income (AGI) in 2013 of $400,000 consisting of $200,000 in wages and $200,000 in investment income, they will owe an additional $5,700 in Medicare taxes ($400,000 AGI – $250,000 threshold = $150,000 x 3.8%).

Consumer Fraud Act

          As attorneys who represent both individual and corporate clients, we view New Jersey’s Consumer Fraud Act as a double-edged sword.  If you are an individual consumer, New Jersey’s Consumer Fraud Act has bestowed upon you an avenue to seek damages (triple damages) if you have been the victim of “any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate, …”.  This is actually a bit misleading because the New Jersey law will find a merchant or other vendor automatically liable of a Consumer Fraud Act violation even if there was no bad intent.  There are a host of specific trades which have extra rules and requirements placed on them.  Failure to meet these strict, technical requirements imposed on them will result in a court’s finding that the business entity committed consumer fraud.  The list of violations explicitly addressed by the Consumer Fraud Act runs the gamut from:  everyday retailer selling merchandise without pricing/labeling on each item; to the misrepresentation of identity of food in menus (did you know that the State defines different cuts of meat?  So next time you order filet mignon, know it is defined as “meat derived from the tenderloin of a cattle”); to the resale (scalping) of tickets for admission to an event; to the requirement that all health clubs properly register with the State (including the requirement to post a surety bond with the State) and also to enter written contracts with its patrons; to assuring the timely delivery of furniture; to specific contract requirements for home improvement contractors; to the repair of home appliances.

          The law is meant to be harsh and not provide much flexibility to the businesses serving consumers.  If you are a consumer and feel you have been aggrieved, know that this law exists and that you have the opportunity to recover three times your damages.  If you are a business, do not make any assumptions about your trade practices.  When in doubt, ask.  A simple fix to an advertisement or a contract could mean the difference in winning your dispute or be taken to the cleaners.

          James J. Delia, Esq.