The president and Congress have finally agreed on a tax law…for now. President Obama signed a tax plan that includes new guidelines for the estate tax, but only for the next two years. Congress will have to revisit the tax plan before 2013.

The law includes a historically high exemption of $5 million per individual, and anything over that threshold will be taxed at a historically low rate of 35 percent. Furthermore, the law once against marries the gift tax to the estate tax, so the exemption and tax rate for gifts made after Dec. 31, 2010 will be equal to the applicable estate taxation.

Additionally, the estates of post-Dec. 31, 2010 decedents have the option to transfer any remainder of $5 million exemption to their surviving spouse.

But what matters for the estates of those who died this year is the decision between taking advantage of the zero-percent tax rate of 2010, or electing to file the final tax returns under the new 2011 law.

While a zero-percent tax rate is awfully attractive, under the 2010 law, heirs are required to pay capital gains on inherited assets over $1.3 million, or surviving spouses inheriting over $3 million. Under the 2011 law, these inheritances would be covered under the $5 million exemption.

Any change in rules can be confusing, but if you have questions about handling a 2010 estate or planning your estate for the next two years under the new tax law, I urge you to get in touch with your estate planning attorney.

James D. Perry

2010 has been a financially rough year for much of America. But many non-profit organizations still say they’ve seen a small increase in charitable giving this year over 2009 numbers.

If you’re in the financial position to give this year, you have a lot of opportunities to do so. Solicitations are everywhere, including direct mail, in churches and community centers, and outside shopping malls and stores. The question then becomes how to divvy up your charitable resources.

The New York Times’ Ron Lieber suggests you first examine “Why” you want to give before tackling the “Where” and “When.”

Why do you give? Do you have a personal connection to a particular charitable cause or feel a responsibility for supporting an organization’s mission? We can all agree that breast cancer research is important, but if it hasn’t touched your life, perhaps you’d rather support animal welfare or after-school education programs.

Once you’ve decided what causes you want to support, you’ll need to determine exactly to what organizations you’re going to give.

Do your research on charitable organizations to see who will use your money most efficiently. Websites such as Guide Star and Charity Navigator provide givers with tools to make informed decisions and tips for charitable giving.

Finally, if you want to give, don’t make a hasty decision just because the deadline for 2010 charitable tax deductions is looming. If you feel you can’t make an informed decision this month, you might want to just roll over your charitable budget into 2011 where you can spread the wealth throughout the year.

‘Tis the season for giving.  But, give with purpose and put your money to good use.

James D. Perry

2010 is not only the year to die; it’s also the year to give.

As it stands now, an individual can give away up to $13,000 tax free this year as part of his or her $1 million lifetime maximum.  But anything over that $13,000 will only be taxed at a rate of 35% — an historic low.

There is still some trepidation among estate planning attorneys as to how to advise their clients to prepare for the 2011 estate tax.  Congress hasn’t made any moves to reinstate the estate tax for this year or to write new laws governing the tax rates for the coming years, and with the 111th session coming to a close, it’s looking less and less likely that they will.

Until new laws are passed, or until Jan. 1 when the old laws return, millions of Americans are set to enjoy the benefit of a 0% estate tax rate for 2010.

But, on Jan. 1, the estate tax rate and the gift tax rate will jump to 55%.  Traditionally, the estate tax and the gift tax rates have matched because Congress didn’t want people ducking the IRS by giving away their entire estates prior to their death.

Christmas is only 63 days away.  This year, at least, giving away some of your fortune may also end up being a gift to yourself.

James D. Perry

One of my clients is an avid stamp collector. He has decided that upon his death, his modest collection will go to his granddaughter who grew up learning about and loving his hobby during their summers together.

Individuals pass more to their heirs than just real estate and money – a significant portion of wealth that is inherited comes in the form of art, jewelry, heirlooms and collections.

The difficulty in determining the value of these items and the fluctuations in tax law between this year and next are proving to be tricky for estate planning and estate settlement.

If an inherited asset that is appreciated in value is sold, the profits likely are subject to the capital gains tax. In previous years, capital gains taxes were measured based on the value of the item at the time of the of the original owner’s death under a step up in cost basis.

But, because the step up in cost basis has been suspended this year along with the estate tax, the capital gains tax against 2010 heirs will be measured based on the original owner’s purchase price – not the item’s current value – unless the estate’s executor includes that item as part of the $1.3 million step up that all estates get.

This could be a valuation and tax nightmare for my client’s granddaughter should my client die in 2010. The capital gains tax for collectibles is 28 percent. And many rare objects will require evidence of provenance and proof that taxes were paid on previous sales.

If you have rare collectibles or heirlooms that you intend to pass on, have the items appraised (every five years is recommended) and keep any papers of provenance and purchase in an accessible file. With the return of the estate tax in 2011, you might also consider donating rare collectibles to a museum or other charity, which would allow you to deduct a portion of their value from your estate leaving more to your heirs.

My client’s collection likely holds more sentimental value for his granddaughter than economic, but her grandfather’s pride in his stamps and meticulous record-keeping will protect her from terrible tax confusion when his collection finally becomes hers.

James D. Perry

There are a number of mistakes one can make in financial gifting and distributing assets among heirs. Being aware of the most common problems and addressing them in creating your estate plan can make for a smoother transition of assets.

Timing your gift to you heirs can be very important. If you leave money to a young person, as I’ve written before, you don’t want to give too soon. Financial maturity does not necessarily coincide with age.

But, if you give too late, or neglect telling your heirs of their forthcoming inheritance, you put them at a financial disadvantage. Inheriting sooner through lifetime gifting, or having knowledge of a planned inheritance might change their financial decisions or present to them opportunities that otherwise might pass by.

When you do give, you also need to consider the amount you’re giving. Giving too much may do your heirs more harm than good. There are tax benefits as well as life lessons you may pass on by sharing the wealth among other beneficiaries or by giving to charity.

If you’re planning to leave unequal amounts to your children, proceed with caution. Unequal inheritances – even where one child is more prosperous than another – can create animosity between siblings that may last through their lifetimes and future generations.

However, in an attempt to prevent these problems, you also don’t want to put in place so many controls that you stifle your heirs and the control they have over their inheritance. A trust can be structured with controls and incentives, though, that can help eliminate many of the previously mentioned problems.

Make sure you’re getting good estate planning advice from an estate planning attorney or financial planner, and avoid these common pitfalls.

James D. Perry

In this digital age, you probably have at least one email account. Perhaps two. And maybe a Facebook page to keep in touch with your grandkids, and a LinkedIn account to stay networked with your professional colleagues. You might even have a blog.

What will happen to all that online information after you die? To the account holder’s benefit, many sites refuse to grant access to anyone other than the account holder. Or, the companies have cumbersome hoops for heirs to jump through to gain control of those accounts, which might include getting a court order. And, the government has very little regulation stipulating how online accounts are to be disposed of upon the account holder’s death.

You will first want to inventory your digital assets: you email accounts, blog, social media and networking accounts (Facebook, Flickr, Twitter, LinkedIn, etc.), and any information stored on employer intranets or computers.

Then, determine the worth, if any, of your digital property. A popular blog or Twitter account with many followers may be worth money. Computer files of your manuscript about the history of railroads, or your ornithological research may have educational value. Photographs and other personal assets may or may not have monetary value, but they almost certainly have significance to your heirs.

Most of us fiercely guard our passwords and account information because of warnings against hackers, viruses, and identity theft. But once you’ve listed all your accounts, you need to decide who will be in charge of each of them (or all of them).

Then, write out your instructions and keep them with your estate planning documents. Otherwise, the decision may end up in the hands of the courts or the website administrators.

James D. Perry

You may be willing to trust your teenage grandchildren to house sit for you while you’re away for the weekend, but would you trust them to properly manage your entire bank account after you die?

Paris and Nicky Hilton, heiresses to the Hilton Hotel fortune, are notorious for their party-girl ways. DUI charges and driving violations landed Paris in jail at the age of 25, and Nicky has a reputation for drifting in and out of relationships with potentially opportunistic suitors. Neither has yet shown the maturity necessary to manage the Hilton’s billions should they take over any substantial part of estate today – much less so had they inherited at the age of 18.

Generally, if you decide to leave an inheritance in trust, the account can provide for the minor’s health, education and maintenance through a custodian (living parent or appointed conservator) until he or she becomes an adult. However, once he or she reaches majority, the remainder of the account is discharged to them outright.

You also have the option to hold a minor beneficiary’s inheritance in a trust to be paid out in stages or based on milestones. For example, you could pay a beneficiary 50 percent of his inheritance when he reaches the age of 25 and the remainder at 30; or, 50 percent when he gets his bachelor’s degree and 50 percent when he gets his master’s degree. Again, though, once the beneficiary receives a lump sum free of trust, that property is vulnerable to bad decisions, lawsuits, and divorcing spouses (only if transformed into community property in California).

There is also the option of leaving the minor’s inheritance in a lifetime trust. The assets are managed indefinitely by a trustee or until a designated time when the beneficiary may take full control. The inheritance is protected from divorcing spouses, lawsuits, and if a third-party trustee is used, from the beneficiary’s own bad decisions. If there is anything left in the trust when the beneficiary dies, you can control who will receive the remainder.

There are added costs that come with the administration of a lifetime trust, including accounting and legal fees. And the trustee may be entitled to receive a fee for services rendered while administering the trust. These costs must be weighed against the amount of inheritance and your own long-term estate planning goals when drawing up your will.

Keep in mind, though that some people will never be able to handle money properly, due to disability or character flaw. Some clients struggle with how much control they can or should have from beyond the grave, but only you can determine how much weight, if any, to give such considerations.

You may not be a Hilton, but careful planning in advance can make for a smooth transfer of property.

James D. Perry

Over their lives, people tend to accumulate a lot of “stuff”: furniture, clothing, knick-knacks, books, personal collections, etc. And when they die, that stuff gets passed on to their loved ones, taking up space in their garages, looking oddly out of place in their dining rooms, or sitting in storage simply because the heirs can’t bear to part with it.

It’s not uncommon as an estate planning and probate lawyer to see how people who inherit furniture and other material wealth tend to unnecessarily cling to those physical items. Even I have been dealing with this in the wake of my father’s death: I just do not want to let some things go.

A recent New York Times article highlights the power we give these material objects over our lives, and points to the problem of hoarding, which has become fodder for reality television shows. Hoarding is a serious compulsion, and most people don’t accumulate stuff to that extreme.

But seeing that extreme can force us to look at how we may be hanging on to unnecessary material things when all we really want is the memory that thing evokes.

The trinkets we’ve been given or that we’ve picked up somewhere special become the physical manifestation of the memory of the giver or the context in which it was gained. But “your mother or grandmother didn’t plan for you to become overwhelmed by them,” says Jamie Novak, a professional organizer and author of “Stop Throwing Money Away.”

Organizing experts suggest that you pass on the memories instead of the goods. And, if you already have Aunt Sally’s armoire taking up space in your living room, take a picture of it before donating it to charity.

You don’t have to hold on to the stuff letting it clutter up you life, when you can more easily hold on to the memories.

James D. Perry

See Jim’s review of Jamie Novak’s book “Stop Throwing Money Away” (John Wiley & Sons) in the Summer edition of the Perry Estate Planning Newsletter.

America’s prison population is nearing 2.5 million – roughly 1 person in every 133 – so it’s not unusual that I’ve had clients who have friends or family who are incarcerated.

Leaving assets to a federal, state, or county inmate comes with some bureaucratic hurdles and must be done with careful assessment.

In California, when an individual dies leaving an inheritance to a prisoner, both the Department of Corrections and Rehabilitation and the Victim Compensation and Government Claims Board must be notified. If a prisoner owes any money as restitution as part of his or her criminal sentence, the VCGCB with the help of the Franchise Tax Board is going to take its chunk first.

For example, I had an elderly client with very little family who willed part of his estate to a friend doing a few years’ time in state prison. His friend did not owe any restitution on his sentence, and all lawyers and state agencies involved were properly notified.

However, it was later discovered that he hadn’t paid child support to his wife in over 15 years. The arrearage was near $100,000, which was roughly equal to the value of the inheritance my client left him.

In some states, the department of corrections may even collect the cost of incarceration from an inmate’s inheritance by filing a lien in probate court. The State of Connecticut’s laws allow the probate court to extract the cost of incarceration or 50 percent of the inheritance, whichever is less.

If you’re thinking of leaving assets to a guest of the State, I urge caution. If you intend to provide a nest egg for a prisoner’s reentry into society, be aware of the debts they may have incurred as a result of their crimes, and recognize that they don’t have the autonomy to make decisions regarding that chunk of change until their release.

James D. Perry

Many grandparents come to me saying they would love to give their grandkids a substantial gift for their college funds and future nest eggs, but they don’t know quite how to do it, and they have fears that their grandchildren will be saddled with the taxes.

The first step is to determine how much you can comfortably give away.

Make an honest assessment of your financial health and your long-term goals. You don’t want to compromise your needs or your retirement by spreading your finances too thin.

Next, know the facts about giving.

In January of this year, the law changed to allow individuals to give up to $13,000, per year, per beneficiary tax-free. This $13,000 is excluded from the giver’s lifetime monetary giving allowance. And, the sooner you put that money to work, the better.

Nearly 85 percent of monetary gifts from grandparents to grandchildren will go towards their college education. Prepaid tuition savings vehicles – like 529s – can help in those efforts. The downside, though, is that capital gains from these accounts not used to pay for education will be subject to taxes and penalties.

Grandparents also have the option of opening a Uniform Gifts to Minors Act account. The first $850 contributed to this account is tax-free. The account is automatically put in the hands of their grandchild upon the state’s age of majority.

However, any money removed from a UGMA account will be taxed as capital gains, and the funds may count against him or her when it comes time to calculate financial aid eligibility for college.

To figure out what kind of plan would work best for you, speak to your financial planner or estate-planning lawyer.

Tis the season for gift giving, so don’t be afraid to share the wealth!

James D. Perry