Welcome to CPA at Law, helping individuals and small businesses plan for the future and keep what they have.

This is the personal blog of Sterling Olander, Certified Public Accountant and Attorney at Law. For over five years, I have worked as a tax professional helping clients with tax mitigation strategies, tax controversies, business transactions, wealth preservation structures, tax-exempt organiations, and estate plans.

I write about any legal, tax, or technological information that I find interesting or useful in serving my clients. All ideas expressed herein are my own and don't constitute legal or tax advice.

Gay Marriage Cases Yield Estate Tax Planning Opportunities

Some of the court decisions on the issue of gay marriage are creating estate tax loopholes that could allow wealthy individuals to pass their estate to their heirs tax free. Every state restricts close relatives from marrying. However, the language of some states' statutes technically only prohibits opposite-sex relatives from marrying, but with a definition of "marriage" that only includes male-female unions.

Consider the statute in Massachusetts, which contains the traditional definition of marriage and provides that "No man shall marry his mother, grandmother, daughter, granddaughter, sister, stepmother, grandfather’s wife, grandson’s wife, wife’s mother, wife’s grandmother, wife’s daughter, wife’s granddaughter, brother’s daughter, sister’s daughter, father’s sister or mother’s sister." There are corresponding provisions for women.

In Goodridge v. Department of Public Health, the court acknowledged this language and said in a footnote that "the statutory provisions concerning consanguinity or polygamous marriages shall be construed in a gender neutral manner." However, the statute has not been updated despite ample opportunity for the legislature to do so. Given this, it is at least arguable that, as Phillip Greenspun pointed out, a "grandfather [could] marry his grandson, give his spouse/grandson a tax-free spousal gift of $25 million, and then get a no-fault divorce after a couple of years."

In contrast, the Connecticut legislature did amend the gender-based consanguinity provisions in its marriage statutes. Shortly after the case of Kerrigan v. Commissioner of Public Health was handed down, the legislature passed Public Act No. 09-13. This act replaced the language "No man may marry his mother, grandmother, daughter, granddaughter, sister, aunt, niece, stepmother or stepdaughter, and no woman may marry her father, grandfather, son, grandson, brother, uncle, nephew, stepfather or stepson" with the following: "No person may marry such person's parent, grandparent, child, grandchild, sibling, parent's sibling, sibling's child, stepparent or stepchild."

It is unclear what rationale Connecticut or any state would have in removing the right of same-sex relatives to marry. As has been astutely pointed out, "[T]he biological rationale for the consanguinity rules makes no sense in the context of two women or two men, as there simply can be no progeny produced between them, and hence there is no possibility of in-breeding."

The state of Iowa chose to remain silent on this question; its statute declares as void any marriage between "a man and his father's sister, mother's sister, daughter, sister, son's daughter, daughter's daughter, brother's daughter, or sister's daughter" (and vice versa) in Iowa Code Ann. § 595.19. The court in Varnum v. Brien did not mention 595.19 or consanguinity and the legislature has not updated the statute since. As such, Iowa has seen fit to allow close same-sex relatives to marry; accordingly, an unmarried woman can marry her daughter and pass wealth to her tax free.

With the 10th Circuit currently considering whether to overturn traditional marriage laws in multiple states, it will be interesting to see how or if it approaches the varied consanguinity provisions within its jurisdiction. Oklahoma is poised to become another state with an estate-tax loophole.

Debt Repayment Strategy

For those who are having trouble managing multiple debts, a debt repayment strategy can save money and also be psychologically rewarding. The first step in any debt repayment strategy is to list all of your debts with the balance outstanding, interest rate, and minimum monthly payment for each. For example:

 Description   Balance   Interest Rate   Minimum Payment 
 Car Loan   $11,000.00   3.5%   $200.00 
 Visa Credit Card   $1,900.00   12.99%   $43.00 
 Discover Card   $3,500.00   14.99%   $83.00 
 Student Loan   $9,500.00   8.99%   $153.00 

The next step is to establish a budget and commit to make the minimum required payment on all of your debts every month; the free budgeting tool at Mint.com that I've been discussing in recent posts could help. In addition to committing to pay the minimum monthly payment on all of your debts, you also must commit to pay a little bit extra towards one of the loans. The extra amount will all be applied to the principal balance, as opposed to interest, and a lower principal balance results in less interest being charged over the life of the loan. While Mint can be used for tracking your debts and payments, other free online tools dedicated to debt reduction such as ReadyforZero.com are available.

Which creditor should be paid the extra amount? All else being equal, this would obviously be the one that is charging the highest interest rate. However, many financial planners recommend making the additional payment towards the loan with the lowest balance. The reason for this is that you will see results sooner as the small balance goes down to zero. By seeing results faster, you will be more likely to stick to the debt repayment plan, which is better than starting with the higher rate/higher balance loan but ultimately abandoning the plan.

Perhaps a good compromise would be to sort all of your debts from highest interest rate to lowest, then move the loan with the lowest outstanding balance to the top of the list and pay off your debts in that order. The order of debts in the example above under this method would be the Visa Credit Card, Discover Card, Student Loan, and Car Loan.

Whatever method you choose, the next phase of the debt repayment plan after the first debt is paid off is important. The entire amount that was going toward the payment of the paid-off debt becomes an extra payment towards principal in addition to the minimum payment on the next debt on your list. For instance, in the example above if you were paying the minimum Visa Credit Card payment of $43 plus an additional $10 each month, after that debt is paid off, the $53 that has been freed up becomes an extra payment to Discover Card in addition to the minimum you are already paying.

This cycle is repeated until all your debts are paid off. As the number of outstanding loans diminishes, the extra amount being paid has grown substantially, similar to a snowball rolling downhill. This "Snowball Method" of debt-payment can help you achieve your goal of debt freedom.