New Bill Provides Temporary Relief for the Estate Tax

Author: Dustin Wetton

On December 17, 2010, President Obama signed into law H.R. 4853, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This important tax extenders bill includes federal tax changes for individuals, businesses, and estates at all levels of income. One of the most important facets of the bill is the part concerning the estate and gift tax.

The deadline for revamping the estate and gift tax was the first of January, 2011. Thus, if no action was taken by Congress, the estate and gift tax laws would be restored to their 2001 levels. If that would occur, the amount that is exempt from estate taxes would be $1 million, and the tax on the rest would be 55 percent. Thankfully though, Congress took action. In this recent legislation signed into law only 13 days before the deadline, congress provided temporary estate tax relief and a modification of the gift and generation-skipping transfer taxes.

To sum up the recent changes that affect the estate tax, the new law has a higher exemption and a lower tax rate. The new legislation sets the estate tax exemption at $5 million per person and $10 million per couple. Thus, if you are an individual, you will not be taxed on up to $5 million of your assets upon your death. Therefore you are able to actually give out to others the inheritance that you had planned for them. Also, there is a top tax rate of 35 percent for the estate, gift, and generation-skipping transfer taxes for two years, through 2012. Thus, if you are an individual with more than $5 million in assets at your death, then anything over the exemption amount will be taxed at a top rate of 35%. Lastly, the proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.

A new tool is granted for estates of decedents dying after December 31, 2010. Under current law, couples have to do complicated estate planning to claim their entire exemption. Yet now, under this new legislation, a couple is allowed to transfer any unused exemption to the surviving spouse without any need for a planning instrument to dictate otherwise. Thus, the first spouse to die can use an estate plan that takes little to no taxes out of their estate, while also protecting the surviving spouse from heavy taxes upon their death.

Lastly, the new bill once again reunifies the estate and gift taxes. Prior to the 2001 Bush tax cuts, the estate and gift taxes were unified, creating a single rate schedule for both. This was subject to repeal if Congress took no action. Luckily though, the recent bill unifies the estate and gift tax once again. The bill is effective for gifts made after December 31, 2010.

With all of the new changes taking place, it is a good idea to use the inspiration of Congress’ action to take action yourself. Check your estate plans to ensure that you are in line with recent changes and that the language in your will or trust allows you to take advantage of the beneficial changes that have just come into affect.

If you have any questions or comments regarding this blog email us at blog@lauruslaw.com

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Home Values and Rising Home Mortgages Rates

Author: Eric Townsend

Over the last couple of years the interest rates on home loans have been at historic lows. In recent weeks we have seen those rates rapidly rise. Those considering selling or buying a home are left wondering how rising interest rates will affect the value of homes. Here is a brief synopsis of how these changes could affect the value of housing.

Home values reflect supply and demand. Increases in supply cause prices to drop while increased demand cause prices to increase. To understand the effect of interest rates we must first understand what supply and demand is.

Supply of homes come from those willing to sell property including private home owner through a regular sale or short sale, banks with foreclosed properties, and also from owners/investors waiting on the sidelines for the right price at which to sell. Of these sellers, short sales and foreclosed properties account for the bulk of sales.

Demand for homes come from the aggregate amount everyone in a market is willing to pay for that supply. This aggregate amount is based on wages, levels of employment, availability of credit and the interest rates associated with that credit, and society’s sentiment regarding the strength or weakness of the economy in general.

So today when we look at supply and demand there are a few things we notice right away. First, supply is remaining constant. We still have several months of inventory, but that inventory remains relatively constant. With a constant inventory that is not increasing the effect of supply on the market should be nominal. Second, demand is also relatively constant. Wages and levels of employment are not going up or down either and recent surveys of consumer sentiment about the economy are improving slightly. The one thing that is not remaining constant is interest rates.

With interest rates being the one factor affecting home prices we must look at how those interest rates change the demand curve. To show the effect of rising interest rates we will use the example of the average demand (D) who is looking to buy a home. Let’s assume that the amount D is able and willing to pay is $1,340/mth. At a 5% interest rate D can buy a $250,000 home. At a 6% interest rate D can buy a $223,000 home, which means the value of the home that he can afford is $27,000 less. This is roughly a 10% drop in the value of that home. If rates rose 2% and D bought a home at 7% interest he could only afford a $200,000 home, which is roughly a 20% drop in the value of that home.

So with everything remaining approximately constant we could expect home values to level off. Unfortunately, interest rates have begun increasing. Home mortgages are based on 10 year Treasury Bonds and the rates on those bonds having increased from a low of below 2.5% just a few months ago to over 3.3 % today. With these increases mortgages rates have also begun to climb. With many new buyers subject to these higher rates principle home values should decline inversely.

On a brighter note, the effect of these higher interest rates is not reflected in values for several months. So if you are selling a home now is the time.

If you have any questions or comments regarding this blog email us at blog@lauruslaw.com

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Income Taxes and Bankruptcy

Author: Dustin Wetton

Ben Franklin once said that “the only things certain in life are death and taxes.” This quote can have many innuendos, one of which is that there is no way of getting out of paying for your taxes. However, during Mr. Franklin’s life, the United States had not yet setup a bankruptcy court or bankruptcy code. Thus, he was unaware of the ability to discharge federal and state income taxes through the bankruptcy process.

The bankruptcy code was initiated to help ease the burden of over-encompassing debt on debtors and to help create and protect the flow of credit. While most creditors are often credit-card companies, health industries, and lawsuits, in many cases, the federal and state governments are also creditors. In these situations, for whatever reason, the debtor owes their respected governments taxes, and thus is established a creditor-debtor relationship between the taxpayer and the government.

This situation is very common in bankruptcy. Yet because the creditor is the government, they have a very high priority of distribution and a more difficult burden of discharging their debt than most unsecured debtors. Thus, if you owe money on taxes from previous years, you can have your debt discharged, that is “wiped clean”, however the following six steps must be fulfilled in order to do so:

1)The due date of filing the return is at least 3 years ago
2)The tax return was filed at least 2 years ago
3)A tax assessment occurred at least 240 days ago
4)The returns are not fraudulent
5)The debtor is not guilty of tax evasion, and
6)The debtor must prove the past four years of filings had been filed.

These six steps must be followed to a tee in order to get the past years taxes discharged. If there are problems in qualifying for any of the steps, an attorney, the trustee, and the IRS are all very helpful in figuring if the debts can be discharged or not. Also, it may be a good idea to get a tax transcript from the IRS and the State for the tax years that you are going to try to discharge to make sure that your numbers are correct.

Quit First, Fired Later

Author: Dustin Wetton

During these difficult economic times, many of us are changing our employment status to seek better economic opportunities. Thus, some of you might be inspired to quit your job for whatever reason and seek employment elsewhere or just take time off. In doing so, lets say that you are respectful to your employer and you give them your 2 week notice. Yet, what happens if that employer is so insulted by you quitting that after you give your notice, they fire you instead. Does this mean you were fired or you quit? What happens if you only had one day left on your notice and they “let you go early?” Questions like these are often asked to employment law attorneys who are helping those recently unemployed receive unemployment benefits. However, I believe that the same logic can be applied to severance pay and other “benefits” of being let go from a job.

Unemployment benefits are normally only allowed to those that leave their job involuntarily. Meaning, if you quit your job because you wanted another job, or just wanted to, then you most likely are not able to receive unemployment benefits. Yet, under California law, if you give notice of your last day and your employer cuts that day short, then you are qualified as leaving involuntarily, even though you intended on leaving a couple of days, or weeks or months, later. If you give notice and they fire you prior to that notice date, “or let you leave early” then you are defined as being “fired” under California law.

In one case the Unemployment Appeals Board held that “the fact that a person may set a date for resigning from employment is not the controlling factor. The most pertinent consideration is whether the employee could have remained working for an employer on the actual date they left.” If they could have continued working, were willing and able to do so, but the employer was not willing them to do so, then they consider it as an involuntary discharge. Thus, if this would happen to you, then you would be eligible for unemployment benefits. Using this same logic, I believe it can also be argued that you would be entitled to the same benefits of severance pay and other “fire-triggered” benefits that are owed to you in regards to your employment contract. Thus, just because you were quitting, gave notice, and were “let go early”, you may still have certain important rights and decisions to make regarding how to handle any transition periods in your employment.

Scope of the Law

Author: Eric Townsend

Over the last few days I have been developing the first class of a pre-law course for students on their way to law school. As a starting off point, I thought it would be good to first categorize the law from a macro level and then go into each area of law in more depth. As I was developing this initial class I realized this might also be a benefit to anyone who was curious about our legal system, and I decided to write this blog to give my readers a brief and broad overview of our legal system.
The main aspect of our legal system can be summed up in one word, “rights”. Rights correspond with duties. Rights are derived in two ways: first, common law rights of each person as defined by case law; second, Constitutional and statutory rights of each person created through our political system. Once a right is established any breach of the corresponding duty makes the violator guilty of breaking the law. In most cases these rights and duties are simple, but in some cases they are not. An easy example, in a contract for the sale of my car to Bob I have a duty to provide the car when agreed. A more complicated example, if property law says that I am the owner of land and it is my right to be free from intrusion onto such land then all of society owes me a duty not to enter my land.
Our common law rights were borrowed from English courts that developed them over hundreds of years. These common law rights are also known as natural rights. They are used to determine the right of each in their own person and the rights of society in property. Although common law rights cover a broad number of actions, if there is a statutory right it takes precedent over common law rights.
Statutory rights derive from two sources: first, from the Federal government through the limited powers given them by the Constitution; and second, from state governments through the 10th Amendment for any other actions not reserved to the Federal government or where they have failed to take action. States can delegate their authority to local governments like cities and the Federal government can delegate their authority to agencies like the EPA. So a statute will be valid if it does not violate this Constitutional framework.
So to understand our legal system, the law has been broken down into several different areas of law to easily explain and define those rights and duties. Property law determines when a person has a right (aka interest) in property, and also the duties of all people regarding that right. Criminal law seeks to define and limit the rights people have in their actions (based on the political beliefs at that time), and uses liberty and monetary punishments to enforce those limits when that duty is breached. Tort law, like criminal law, seeks to define and limit the rights people have in their actions, and uses monetary punishments to enforce those duties. Tort law additionally seeks that the tortfeasor restore the injured party by monetary contribution in the amount of the harm caused. Contract law seeks to enforce the heightened rights created when people agree to them and to enforce breaches of those duties. Constitutional law provides the framework for our Federal government, it gives limited guidance on the framework of state governments, and it establishes the rights and duties as between the Federal and state governments, between the people and those governments, and between ours and foreign governments. Other types of law will generally be offshoots of these overarching legal areas.
From a broad view, this is our legal system.

If you have any questions or comments regarding this blog, email us at blog@lauruslaw.com.

Probate Prices on the Up and Up in San Diego

Author: Dustin Wetton

New court legislation in San Diego has caused the prices of filing for probate to increase in San Diego. As of the beginning of this month, the cost to file a probate filing with the court is $395. The filing cost is just the amount needed to create a probate case, it does not include the probate code regulated attorney fees, court fees, and examiner fees also associated with probate.

Yet before indulging into these costs, let’s reflect again on what exactly probate is. The probate court is a court designed to distribute and administer a person and their properties once that person dies. This is done for every individual that does not have a trust. Even if that person has a will, they still encounter and run through the gamut of the probate process. The only way to avoid probate is to have a valid trust established.

Thus, for purposes of this article, let’s say that there is no trust established by the deceased person. To initiate the process of distributing their assets, the remaining loved ones will have to file a petition for probate and incur the recently increased costs in San Diego of $395. This is just the initial filing fee. Once the documents are gathered and an examiner or attorney is appointed, then the court will add additional fees to the process. These fees are regulated by the probate code. One such fee is the court fee. The court fee ranges from $1,000 to $3,000 dollars, depending on the amount of complexity with the case. The other fee, the more costly one, is the attorney or the examiner fee. This fee is determined by the probate code by matching a certain percentage with the amount of the estate. For instance, if the estate values at $100,000, the attorney fee is 4%. This percentage heavily increases as the estate increases. The attorney fee can quickly reach $25,000. Determining the value of the estate is done by valuing all real and personal property of the deceased person, thus, it adds up fast when there is a car, jewelry, a house, and even clothing.

Therefore, with all the fees associated with probate, either the estate itself will foot the probate bill and thus disinherit some beneficiaries, or the remaining loved ones will have to pay the fees. Yet, as mentioned above, the probate process can be side-stepped through an established valid trust and estate plan. Further, the probate court only administers to the deceased person and their assets, a whole different court and different fees will be in addition to the cost of probate if there are any minors left behind. To best side-step these fees and costs, an estate plan is needed. Contact us at (619) 796-2381 to setup a free 30-minute consultation to start your estate planning.


If you have any questions or comments regarding this blog, email us at blog@lauruslaw.com.

Issues with Short Sales

October 31, 2010
Author: Eric Townsend

Short sales are more prevalent than ever and many Americans are using them as an alternative to foreclosure. Negative equity home owners see a short sale as a way of limiting their liability. Unfortunately, this is a mistaken belief and acceptance of the short sale by the lenders does not necessarily mean all future litigation of the remaining debt is barred. In some circumstances not only can the lender go after the short seller after the short sale, but, depending on the circumstances, the judgment could be non-dischargeable through bankruptcy.

With a myriad of state and federal laws protecting home owners most residential short sales approved by lenders will result in no future liability, but will remain in several circumstances. Some of these liabilities are created by the lenders and are strictly unenforceable under California state law. Others liabilities were created at the time the short seller created the loan for the subject property. In these circumstances it is very important to understand when there are legitimate and illegitimate liabilities places on the short seller. Once the short seller understands the legal ramifications of completing a short sale only then should action be taken.

Without understanding the liabilities a short seller may be subject to, or to assume an illegitimate liability, it is easy to place a short seller in a position of liability that could have been mitigated with adequate legal advice. In some, but not all, cases lawyers can use simple strategies to help prevent the future liability of these short sellers.

A short sale done properly should operate as a settlement because in fact the short seller is helping the lender to procure the highest proceeds through a non-distressed sale. These actions are valuable to the lenders, and should be used for bargaining the removal of the short seller’s liability, but only a licensed attorney can explain and guide these short sellers to that result.

If you have any questions or comments regarding this blog, email us at blog@lauruslaw.com.