Friday, October 23, 2009


I just finished reading a a Wall Street Journal article by Laura Saunders on the issue of what will happen to the Estate Tax next year the and consequences thereof. The current Federal Estate Tax exemption ($3.5 million) is set to "disappear" next year. (The current law is expiring). Most people would say "Great! So it doesn't matter how much I own, if I die next year there will be no estate tax due for my kids." Unfortunately, there may be much bigger problems to consider.

The current estate tax law was enacted by Congress back in 2000. It increaed every year and it is currently at $3.5 million per person ($7 million per couple). In otherwords, if you and your spouse own $7 million in assets and died in 2009, you can pass all the assets to your heirs and they wont owe any estate tax - which is at 45%.

Under the current law, the will be no federal estate tax at all for 2010 and in 2011 it will follow the current lifetime gift tax exemption of $1 million per individual ($2 million for a couple). In the above situation, if the above couple died in 2011 with an estate of $7 million, $5 million would be taxed - if the rates stays at 45% - then the heirs would owe $2.25 million on their inheritance.

It is believed among most in the industry that Congress will step in very soon and extend the current exemption because of the collateral tax damage this "lapse" can cause. It is really an issue of what is called a "step-up in cost basis". This means that when someone inherits an asset, the value of that asset is "stepped up" to the current value at the time of inheritance (date of death). Without a "step-up", the asset would retain the original value from when the original owner acquired it. If the estate tax goes away, so will this "step-up in cost basis".

Here's an example:

Let's say your mother leaves your son a stock that she bought in 1970. She paid $5 for the stock but tody it is valued at $75. Under the current tax law, if mom died today, when your son inherits the stock, the value is $75. So if next year your son sells the stock and it sells for $80, he will only have to pay capital gains tax on the $5 profit. Without the "step up", the original cost of $5 for the stock would transfer to your son (called a "carry-over basis"), so when he sold the stock at $80, he would now have to pay capital gains tax on $75 profit. Now if you apply that same principal to something larger, like a home purchased for $50k in 1970 and is valued at $750k today, it is clear how much of a tax burden this will place on your son. This is also why gifting an asset versus allowing it to pass through inheritance is not always the best option.

There are many possible solutions being proposed in congress right now. Something may be passed by the end of the year, something may happen later and be applied retroactively, it is definately an area to be aware of and if you haven't developed your estate plan, yet, it is definately a time to get things done and protect your estate not only from probate, but also to attempt to minimize the tax burdens on your heirs while we still have the ability to do so.

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Saturday, October 17, 2009

Mediation: What is it & what Is It good for?

I spent 40 hours last week in a training program, the Essentials of Mediation & Divoce Mediation in Novato, CA and came away with some amazing tools to branch out into the field of Mediation. Now this is not to be confused with Meditation at all, but I realize that meditation prior to a mediation is probably not such a bad idea.

As a Mediator, it is imperative to maintain neutrality throughout the process in order to effectively facilitate a collaborative dispute resolution (i.o. help people come up with a solution to conflict).

Mediation has been defined as "a cooperative dispute resolution process in which an impartial third person facilitates communication between the parties to help them reach a mutually accceptable resolution that is better than their alternatives"

Mediation is an alternative form of dispute resolution. It is alternative to:
  • Litigation
  • Arbritration
  • Direct negotional between two parties alone
  • Settlement conferences with attorneys
  • Special Masters
  • Private Adjudication
  • Self-help
  • Doing nothing.
Mediation is not theraphy or relationship coaching but here's what it provides:

Mediation is:
  • Voluntary
  • Informal
  • Private
  • Confidential
  • Decision making is done by the parties (not the mediator)
  • Focus is on the parties needs and interests (not necessarily the law)
  • Emphasized mutual problem solving
  • Tends to be more efficient and less costly than litigation
  • Parties work towards a mutual gain rather than a win/lose (as in litigation)

When is Mediaton appropriate:

  • When there are multiple issues
  • When the parties want to control the outcome (not a court or arbitrator)
  • When the conflict involves communication problems
  • When the parties have or had a relationship
  • When the parties want to save time, money and stress (avoid litigation)
  • When resolution is possible without necessarily assigning "fault" or "liability"
  • When personal/emotional issues exist
  • When the parties perceive the facts differently
  • When there are creativve possibilities for resolution

When may Mediation not be appropriate:

  • When one or more parties want a definite ruling on the issues in a conflict - vindication.
  • When one or more parties will only be satisfied if the other parties suffer - revenge.
  • When the parties have "nothing to lose" by going forward to litigation or some other process - or "little to gain" by going to mediation.
  • When one or more parties is not participating in the process in good faith
  • When distrust is so hight that the parties have no faith in the viability of a potential agreement.
  • When a significant power imbalance exists and connot be addressed constructively
  • When a party is unable to effectively participate in the process due to physical, mental or emotional incapacity.

Here are just a few types of matters that mediation can help resolve conflicts:

  • Divorce (property, custody, visitation, support, etc.)
  • Probate
  • Trust administration conflicts
  • Employment
  • Discrimination
  • Community issues (neighbor disputes, etc.)
  • Business transactions
  • Business/Partnership dissolutions
  • Real Estate transactions
  • Administrative agency conflicts

To find out more visit or call the Law Office of Amy L. Alvis at 925-478-6435