Federal Estate Tax "Death Tax" Is Back to Life for 2011 and Beyond

Written by Curtis G. Swarts, CPA

The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually lowered the maximum tax rate imposed on estates while substantially raising the applicable exclusion amount for tax years 2002 to 2009. Over these years the maximum estate tax rate fell from 60% (55% marginal rate plus 5% surtax on estates from $10 million to $17 million) to 45% for tax years 2007 to 2009.

For historical perspective, the federal estate tax was originally enacted in 1916, when it was imposed as a 10% tax on estates in excess of 50,000. The tax rates and exemption amounts have varied since that time, reaching as high as 77% on estates in excess of $60,000 for decedents in 1941 to 1976.

For 2010 the Economic Growth and Tax Relief Reconciliation Act of 2001 repealed the estate tax completely for decedents dying in 2010. This resulted in several well noted instances of multi-million and even a few multi-billion dollar estates passing to heirs completely free of the federal estate tax.

This one year hiatus comes to an end with the recently enacted Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Under this act the federal estate tax “Death Tax” comes back to life for 2011 and 2012. The exemption amount will start at $5 million per individual in 2011 and be indexed for inflation thereafter. The maximum estate tax rate for these years will be 35%.

A further provision of this act allows the heirs of decedents dying in 2010 a choice of electing to apply 2010’s rules vs. the rules for 2011. This provides a planning opportunity for taxpayers and their tax professional related to the calculation of capital gains taxes on assets inherited in 2010. Taxpayers finding themselves in this circumstance should immediately consult their tax advisor.

LEGAL INTEREST IN NEVADA FOR FINANCIAL EXPERTS AND LAWYERS

Written by George C. Swarts, CPA and Kimberly McCall, CPA

Nevada Revised Statutes NRS 17.130 and NRS 99.040 govern the calculation of legal interest in the State of Nevada. Lawyers and financial experts should consider recovering both pre-judgment and post-judgment interest when calculating damages and amounts due to their clients.

Parties to contract disputes or other litigation can wait years between the actual event that triggered their claim for damages, the resolution of their court case establishing their right to payment and the actual payment of monies due for damages. Legal interest provides a mechanism to allow the damaged party to recover losses associated with this time delay.

In the matter of Kerala Properties, Inc. vs. Familian, the Supreme Court of the State of Nevada summarized that “three items must be determined to enable the trial court to make an appropriate award of interest: (1) the rate of interest; (2) the time it commences to run; and (3) the amount of money to which the rate must be applied.” Careful attention must be paid to selecting the proper interest rate and the appropriate time period.

In Nevada, if the contract between the parties includes provisions for interest and its calculation, these terms prevail over the statutory conditions. If the agreement between the parties is silent or no written contract exists, interest is calculated at the Nevada statutory rate. This rate is defined in NRS 99.040 as ‘the prime rate the largest bank in Nevada, as ascertained by the Commissioner of Financial Institutions, on January 1, or July 1, as the case may be, immediately preceding the date of the transaction, plus 2 percent.” The prime rate is posted on the Nevada Division of Financial Institutions website.

In the Kerala Case, the Supreme Court concluded that under NRS 99.040, the rate adjustments on January 1 and July 1 apply only to post-judgment awards. In this same matter, they held that when calculating pre-judgment interest, the interest is fixed at the rate in effect on the date of transaction. Also, the date of transaction, defined as the date the contract was signed not the date expenses were paid, was found to be the appropriate starting date in Kerala because “that was the date when the breaching party incurred obligations to the non-breaching party.”

The inclusion of only post-judgment interest and, accordingly, the omission of pre-judgment interest, could deprive clients of monies rightfully due to them. Then, if the financial expert or attorney were to err in selecting the appropriate interest rate or time period when calculating interest, these mistakes can potentially cost their clients thousands of dollars. Attorneys and financial experts should review case facts and components of the interest calculation thoroughly when determining amounts due.

NEW FEDERAL COURT RULES: GOOD NEWS FOR EXPERTS AND ATTORNEYS

Written by George C. Swarts, CPA and Kimberly McCall, CPA

FRCP Rule 26(a)(2)(b) amendments took effect on December 1, 2010. Under the new rules, experts and attorneys will be able to communicate about the content of expert reports without having to disclose drafts that were shared before the final report was issued. This will streamline the preparation of expert reports and eliminate the need for dual experts in many cases.

During the years since the 1993 establishment of FRCP 26(a)(2)(b) experts testifying in Federal Court have had to carefully avoid generating and disseminating draft reports for fear of having to disclose them in the ordinary course of discovery. This created the risk of exposing all of the thought processes and analysis that lead up to the final conclusion.

Testifying experts have used various techniques to avoid this problem such as limiting written communications with counsel and continuously overwriting the report so that in the end, no discoverable draft reports exist. Using this method, attorneys get their peek at the report before issuance by reviewing the electronic file on the expert's computer or by web-conference.

Many lawyers made it a practice to hire two experts for the same task, one to consult and assist in the discovery and theory of the case, and then another disclosed expert to finalize and testify in court. This arrangement obviously added greatly to the cost of litigation.

The new rules will streamline the process and should save time and money in the preparation of expert reports. Drafts of reports and other communication related to report preparation will no longer be subject to discovery. However, the expert's compensation, and the facts, date, and assumptions relied upon will still be discoverable.

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The Beginning of Swarts & Swarts CPAs in Las Vegas, Nevada

Swarts and Swarts, Certified Public Accountants was established in 1995 by George C. Swarts, and his son, Curtis G. Swarts. Since then our firm has been providing high quality accounting, consulting, and litigation services to a wide variety of clients right here in southern Nevada as well as in many other states and foreign jurisdictions.