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Newsletter Volume 9 (September 2004)

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Dear Clients,

This is the second time I am trying this & I want to thank those of you who wrote me back or called me about the first one. I had some nice feedback.

This time I would like to address a VERY big tax issue for some people (more than you think) as well as some more privacy/fraud issues.

The first topic is Estate Taxes (specifically for those of us in Washington – for you clients who live out of state, it might be an interesting read, too.) The following is reprinted with the kind permission of the writer – Cynthia Flash, a freelance journalist & The Seattle Times. This article appeared in the August 8, 2004 issue of the paper. The entire article is reprinted here in blue & a different font so you know it is not my work.


What you need to know about Washington state's estate tax

By Cynthia Flash
Special to The Seattle Times

When Barbara Sauerbrey's 91-year-old mother died in February 2002, her estate was worth less than $1 million — an amount low enough that the estate would owe no federal estate taxes .

What Sauerbrey didn't realize was that even though Congress had raised the federal estate -tax limit to $1 million, the state of Washington did not follow suit. Its estate tax no longer mirrored the federal estate tax.

As a result, Washington 's estate -tax limits are lower than the federal limits, forcing Sauerbrey's mother's estate to pay roughly $33,000 to the state of Washington .

Many Washington residents — like Sauerbrey of Bellevue — are unaware that a state of Washington estate tax even exists. There has been so much publicity about the federal government raising the federal estate -tax limits that many assume the state has done the same thing. That did happen in some states, but not in Washington .

"Every state is a little different and there are eccentricities in every state," said Tom Culbertson, a Spokane lawyer who chairs the Washington State Bar Association Estate and Gift Tax Committee.

Large Washington estates are actually paying more in estate taxes now than they did before Congress raised the federal estate -tax limit in 2001.

And all taxable estates are paying more in Washington state than they would in states — such as California — that have raised the state estate -tax limit to mirror the federal law.

"I am troubled by the fact that Washington has backed into an overall increase in estate -tax rates, at least for larger estates," said Mike Carrico, an estate -planning lawyer with Riddell Williams in Seattle and president of the Estate Planning Council of Seattle.

For example, someone who died in Washington or California in 2001 — before the federal estate laws changed — would have paid the same estate taxes . However, because Washington 's laws no longer mirror the federal laws and California 's do, there are now vast differences.

On a $5 million estate , a Washington resident who dies this year will have to pay about $1.96 million in estate taxes , compared with $1.66 million if they lived in California — a difference of about $300,000.

Estate planning in Washington is different from elsewhere in the country in several other areas — including requirements for witnessing wills, setting up health-care powers of attorney and health-care directives, going through probate, setting up charitable gift annuities, and using revocable trusts.

While much hoopla has surrounded the federal government's move to abolish the federal estate tax — which is set to completely go away in 2010, but to then come back to 2001 levels in 2011 — most people continue to live without a will.

Only about 42 percent of adults currently have a will, 5 percent less than in 2000, according to Martindale-Hubbell, the New Jersey-based legal resource firm. Reasons include procrastination, fewer assets and uncertainty about the estate tax.

In Washington state, the estates of residents who die without a will generally are distributed according to state law to the closest family members.

That means anyone who wants to name a guardian for their minor children, give money to charities or exclude certain relatives from their estate plan must have a will to ensure their wishes are fulfilled.

Washington 's estate tax

Unless the Legislature acts, Washington 's tax is frozen in time, forever governed by Washington and federal laws that were in effect on Jan. 1, 2001, Carrico said.

Its rules now differ substantially from the federal tax laws. In most states, the local estate -tax exemptions have changed to conform to the other federal exemptions.

But in Washington , residents with estates of $850,000 or more must pay a Washington tax, even though they can have $1.5 million before owing federal estate taxes . In 2006, the Washington exemption rises to $1 million, which will be $1 million less than the $2 million federal tax exemption. A resident with a $2 million estate in 2006 would owe no federal estate taxes , but would owe the state of Washington $99,600.

In addition, Washington 's tax will continue even if the federal tax is ultimately repealed. Thousands of Washington residents — including Sauerbrey — are included in a class-action lawsuit against the state challenging the state estate tax. A Thurston County Superior Court judge in December ruled that the state estate tax was legal and the state Supreme Court has agreed to hear the case this fall.

Cindy Evans, an estate -tax specialist with the state Department of Revenue, said that when taxpayers call her department after receiving a letter from their lawyers that they should update their wills, she advises them to at least look into it.

"We tell them there were some big changes made in 2001 that could result in a potential tax of $66,400 [this year]," she said.

There are some ways to avoid the state tax — at least temporarily. Couples in Washington state can write their wills to avoid state estate taxes after the first spouse dies.

However, taxes still will have to be paid when the second spouse dies. Carrico advises residents to check with their lawyers to make sure their wills and estate plans are up to date — to make sure they reflect differences between Washington state and federal estate -tax laws.

He and other lawyers say they've also seen some Washington residents move out of state to avoid paying state estate laws. Some move to out-of-state vacation homes. One elderly man who knew he was dying even moved to California shortly before his death to save his family from paying estate taxes .


While many people like to go online to fill out a simple will or even buy a form from the office-supply store, it is imperative that wills of Washington state residents be signed before two witnesses.

Handwritten or computer-generated wills are useless unless they are signed before witnesses. That includes changes to wills, which also must be signed before two witnesses. The only exception is a separate sheet of paper that lists where personal possessions — legally called "tangible personal property" — goes — as long as there is a reference to that list in the will.

Health-care directives

Washington state offers individuals a specific "health care directive" form they can sign to tell a doctor or the hospital not to intervene medically if they become terminally ill or permanently unconscious.

However, Washington does not have a form to designate a legal representative under a "health care power of attorney" — a person who would make health-care decisions if you are unable to.

Such forms can be obtained from lawyers who are familiar with them.

Revocable trusts

The state attorney general in March filed a lawsuit against a company that sold overpriced living trusts to Washington residents. The lawsuit was filed because the firm was being deceptive and overcharged its customers, most of whom didn't need living trusts.

Living trusts often are sold to people who want to avoid probate — the legal process required to settle an estate .

Living trusts are popular in some states like California where there are mandatory attorney fees that push up the cost of probate. But they are largely unnecessary in Washington state, where "we have a very simple, consumer-friendly probate system," Carrico said.

"In Washington , the lawyer gets what the lawyer earns and the family can have those fees reviewed by the judge." Some people who should consider living trusts, however, include those who are in a domestic partnership, individuals who own property outside of Washington , or those who want to keep the details of their wills secret.

Planning without a will

As another alternative to a will, Washington state also offers a "community property agreement." With this one-page agreement that can replace a will, a couple simply records that they own property together and that when one spouse dies, the other receives all of the property and vice versa.

With this agreement, individuals can avoid probate altogether. This approach can work well for couples with estates under the state's current estate -tax limit of $850,000 because they don't have to worry about estate -tax planning.

In addition, people can do without a will by designating their assets as "payable on death" or "transferable on death" to named individuals or by setting up securities or bank accounts under a joint tenancy or joint with right of survivorship designation.

For real estate , a special "future interest deed" can be used to transfer property to the beneficiary upon death. If all of an individual's property is covered by such arrangements, his or her estate might not need a will and would not need to go through probate.

Charitable gifts

The state estate tax may prompt individuals to consider giving to charities through a will or other estate -planning arrangement to cut down on the state tax, said Bill Zook, executive vice president of Planned Giving Services, a Seattle firm that advises charities on estate gifts.

"Because there's a lower threshold that applies to the state estate tax, it offers the ability to someone whose estate wouldn't be subject to federal taxes to save on state taxes by putting a charitable bequest in their will," he said.

In addition, he cautions that in Washington state, charities (excluding certain public universities) must be certified by the state Office of the Insurance Commissioner to offer charitable gift annuities — a philanthropic instrument that allows donors to give money or assets to a charity and receive fixed payments from that charity until they die.

The bottom line, say those in the estate -planning community, is to take charge and know the laws in Washington state so you are not surprised. "Get with it, go see your planner, think about it," Carrico said. "It's unpleasant, but you have to do it."

Copyright © 2004 The Seattle Times Company


My next topic is Consumer Fraud – two types

I would also like to address credit card fraud.  Last month I opened my visa bill and found a $2995 charge from an avionics company in Texas .  I happen to know that avionics are the electronic devices used in airplanes & could not remember ever owning a plane! I checked with my wife (maybe she was buying me one) & with Alaska Airlines (maybe they are charging their frequent fliers to maintain the fleet?).  Nope to both.  It turns out some guy in Singapore had faxed to the company MY visa number (with a wrong expiration date) & ordered some parts.  Luckily for the company, they had not shipped the parts yet so they were not out the cost of the equipment & I had visa cancel the transaction.  The upshot of this is – please verify ALL charges on your account every month (this goes hand in hand with balancing your bank account monthly – we won't go there though).

E-mail fraud is getting more sophisticated.  I KNOW we have all received tons of spam (if you can weigh the stuff that is).  I had a ‘fishing' spam yesterday from a bank I do not deal with.  It was about the bank's changing of various systems & needed me to verify – ready for it – my social security number, date of birth, mother's maiden name, account numbers (if any), address & phone number.  The nerve of some people! The message & the link (I tried it) were very realistic & the logo was authentic. The real giveaway was that I do not deal with this bank & I never have.


Business Opportunity !

If any of you need to relocate your business or know of someone who does (or opening a new business), I have a commercial building available for rent. The address is 515 Main St , Edmonds . It is about 800 sq ft & the rent is $1600 per month. It is in the heart of Downtown Edmonds – about 75 feet from the fountain. Please call me with any questions.

Remember to contact me if you have questions about any of these issues or ANY tax questions. I prefer you call now than surprise me next year when it is too late for me to fix any problems that you ‘did not want to bother Chris' with.


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