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.

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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.

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Budgets and Goals on Mint.com Part II

In my previous post, I discussed using Mint.com to track outgoing and incoming cash, categorizing line items on the Transactions menu, and integrating these items with Budgets. The topic of this post is Mint's Goals.

To set up a goal, click the Goals tab, select one of the predefined goals or a custom goal, and answer the questions as prompted, such as source of funding, target date for reaching that goal, desired monthly contribution, etc. Each goal should be linked to an account so that Mint can track the balance and report on your progress. The Goals function is a particularly good fit for the situation I addressed in my previous post, paying off a credit card balance you are carrying.

The difficulty some have experienced with Goals on a Budget is that while Mint can reduce your projected monthly net income by the goal contribution amount, the goal amount is not linked to any Budget payment. This means that there is no indication on the Budgets tab whether a payment was actually made towards a goal in a month and no goal contributions appear on any report of expenses, net income, etc. If you create a budget item for the goal amount, the contribution toward the goal will essentially be double counted on the Budget.

The workaround for this is to add the goal amount as a budget item and exclude the goal amount from the Budget calculation. This is done by clicking on the Budgets tab, scrolling down to the goal, clicking Edit Details, and opting to exclude part or all of the goal amount from the budget calculation. This is also the appropriate way to treat a goal where the funding for that Goal comes from an account that is not linked to Mint. For example, if you set a retirement goal, employer contributions to a retirement plan would never appear as income, so that monthly goal contribution should be excluded from your budget calculation.

In summary, in order to set Goals, categorize transactions, and establish Budgets in Mint and have your reports provide accurate information, the key is to focus on each account type and the unique interaction each account has, if any, with other accounts being tracked by Mint.

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Budgets and Goals on Mint.com

My wife and I have used Mint.com for personal finance management for over three years now. While it is not perfect, it is low-maintenance, fairly intuitive, and completely free. After signing up, Mint accesses the transactions from your financial accounts and helps you categorize income and expenses, establish budgets, set goals, and generally stay on top of your personal finances.

Many Mint users have expressed frustration at understanding the relationship between Mint's Budgets, fund transfers reporting, and Goals; this is one of the areas of Mint that is not always intuitive. Hopefully, the following explanation helps.

The first thing to understand is how income, expense, and transfers are handled in Mint. When you deposit your paycheck or pay for movie tickets with a debit card, you have income and expense respectively; Mint's treatment of cash coming in from or going out to an outside source is straightforward.

If you pay for a movie with a credit card, and pay off the credit card at the end of the month, Mint records three transactions: the charge to the credit card, the debit to the checking account when the payment is made, and the credit to the credit card account when the payment is received. The net result is the movie expense; the two payment transactions, if properly classified as a Transfer, net to zero. Everyday income, expense, and credit card transactions are grouped in the Cash and Credit section of the Transactions menu and appear on Mint's Budgets.

All payments or transfers from one account to another, where both accounts are Cash and Credit accounts, should be categorized as a Transfer and net to zero. If you have a loan such as a mortgage, activity on the mortgage account will appear on the Loans section of the Transactions menu, as opposed to Cash and Credit. Payments from your checking account to your mortgage account should be categorized as an expense, as opposed to a Transfer, and will appear as a cash outlay in Budgets.

In contrast to Mint's treatment of a traditional loan, suppose a large emergency expense occurs in one month, such as a medical bill, and you charge it to a credit card and plan on carrying a balance. In this situation, the "loan" will appear as a large expense in one month and the payments will be categorized as a Transfer in subsequent months. In other words, there will be no budgeted cash outlay in Budgets in subsequent months; each time a payment is made on the credit card, there will still be a debit to the checking account when the payment is made and a credit to the credit card account when the payment is received.

If you classify the debit to the checking account as an expense so that it shows up on Budgets as a cash outlay, the credit to the credit card account will still be listed as a Transfer and ignored on the Budgets, and your budget over time will ultimately count the large expense twice. The initial credit card charge will be an expense in month one, and each subsequent credit card payment will also be an expense. You are faced with either double counting your expense over time or not being able to effectively budget for the cash outlay each month a payment is made. The solution to this problem may be Goals, which I will discuss in my next post.

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Educational Assistance Programs

Companies who hire students or potential students can offer educational benefits that would be more beneficial to both employer and employee than a standard wage offer would be. This can be accomplished through the fringe benefit known as an Educational Assistance Program.

An Educational Assistance Program allows an employer to provide an employee assistance in paying for tuition, fees, books, and supplies for education. Benefits provided under this program will not be subject to income or employment taxes, and the first $5,250 will be excluded from the employee's income each year.

The requirements are as follows: (1) The program must benefit employees who qualify under rules set up by the employer but that do not favor 5%-or-more owners or employees earning more than $115,000; (2) the program may not provide more than 5% of its benefits during the year for shareholders or owners; (3) the program may not allow employees to choose to receive cash or other benefits that must be included in gross income instead of the educational assistance, (4) the employer must give reasonable notice of the program to eligible employees, and (5) the program must be in writing.

To illustrate how such a program can be better for both an employer and an employee who is indifferent about receiving wages or educational assistance as compensation, assume that an employer is contemplating offering an employee an annual raise of $5,000. Were this raise to come in the form of a salary increase, the employer would need to first deduct 6.2% for social security, 1.45% for medicare, and some amount for income tax withholding, say 5%, for a total of $632.50, leaving the employee with $4,367.50. The employer must pay out, in addition to the $5,000, an additional $382.50 for the employer portion of social security and medicare, for a total of $5,382.50.

In contrast, if the annual raise is in the form of educational assistance, neither the employee nor the employer is subject to any of the above taxes. If the employer offers a raise of $5,250.00, the total payout will be $5,250.00, a savings of $132.50. The employee will have $5,250.00 of his or her educational expenses paid for, a net benefit of $882.50 compared to receiving a salary and paying for tuition with after-tax dollars.

Certainly, an educational assistance program isn't appropriate in all cases, but it can provide savings and incentives to both the employer and employee for whom the situation is right.

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Valuation Discounts

One of the primary objectives of estate planning is to arrange for the transfer of wealth to the next generation at the lowest possible cost. For large estates, the most significant cost is the gift and estate tax. These two tax regimes are essentially a single tax imposed on total lifetime gifts plus the value of property transferred at death. As mentioned in a previous post, gifting during lifetime can be part of an estate planning strategy.

For a gifting example, assume a gift tax rate of 40% and a donor who has previously utilized his or her entire tax exemption and who desires to make a gift of $1,000,000 of a $4,000,000 investment in a publicly-traded company.

After making the gift of the $1,000,000 asset, the donor will pay a $400,000 gift tax. Obviously, a key factor in the calculation of the gift tax is the valuation of the stock that is the subject of the gift. In this case, the valuation is straight-forward because the stock is easy to sell and has a ready market.

However, consider the gift of a small, privately-owned family business. In this case, the value of the asset will reflect the fact that there is not a ready market for the business; it is more difficult to sell. In addition, the value of a minority interest in a private business will reflect a lower value if the owner does not have managerial control.

For planning purposes, both the "lack of control" and "lack of marketability" discounts can be effectuated in not only the small, privately-owned family business context, but also for nearly any other asset. For example, suppose that the owner of the $4,000,000 stock investment first transfers the stock into a limited partnership. Subsequently, if the owner transfers a 25% limited partnership interest to a donee, the value of the gift for gift tax purposes will be less than $1,000,000.

This is because there is not a ready market for a privately-owned partnership interest. Furthermore, instead of owning $1,000,000 worth of publicly traded stock outright, the donee merely owns a 25% limited interest in a private partnership. Since the donee lacks managerial control over that interest, it does not matter that the underlying asset is publicly-traded stock; the lack of control discount would apply in addition to the lack of marketability discount.

If the total valuation discount in this case works out to be 30%, this results in a gift valuation of $700,000 instead of $1,000,000. This results in an accompanying gift tax of $280,000 instead of $400,000, an immediate cash savings of $120,000 simply by utilizing the limited partnership.

Source: Valuation, Jonathan C. Lurie and Edwin G. Schuck, Jr., The American Law Institute - American Bar Association Continuing Legal Education, 2008

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Basic Visual Basic for Excel Part IV

This is the fourth and last post in my introduction to learning and utilizing Visual Basic in Excel. As you may have guessed or experienced, writing Visual Basic code from scratch is extremely difficult. Realistically, there are simply too may classes, properties, commands, and syntax rules to learn before a beginner can automate a task by coding from a blank slate. Fortunately, there is an easier way.

If you need to automate a repetitive task in Excel, consider recording a macro, whereby the code for the actions you take is written automatically. The Record Macro button is located in the Macros menu, which is within Excel's View menu. The "Use Relative References" button at the bottom toggles between relative and absolute references on your spreadsheet. If the task you are trying to automate will always occur at the same location on the spreadsheet, make sure Use Relative References is off. However, if the task you are trying to automate will happen at different locations on the spreadsheet, highlight Use Relative References.

One task I find myself repeating a lot, when working with a filtered table in Excel and after having implemented multiple filters, is needing to unfilter the whole table. To do this, I usually just click the Filter button from the Data menu to turn off filtering, select the whole sheet, and click the Filter button again. To demonstrate how to automate this repetitive task, I will record a macro. In order to follow along, you will need a filtered table in Excel (if you need a quick data set, feel free to copy the entity table I used in this previous post).

After filtering one of the columns in your table, click View, from the Macros menu click Record Macro, select a shortcut key (such as Ctrl+Shift+A), and press OK. Everything you do until you click Stop Recording from the same Macros menu will be automatically coded into a new module. While recording, first unfilter the entire sheet by clicking View, Filter; second, select the entire sheet by clicking in the blue box to the top left of A1; and third, click Filter again. Press the Stop Recording button, and within your Visual Basic editor (click Alt+F11 to get there) you should have the following code in Module1:

Sub Macro1()
'
' Macro1 Macro
'
' Keyboard Shortcut: Ctrl+Shift+A
'
    Selection.AutoFilter
    Cells.Select
    Selection.AutoFilter

End Sub

From the spreadsheet, you are now able to unfilter the entire table easily by clicking Ctrl+Shift+A each time. This has been an example of recording a macro, and this concludes my four-part primer on how to automate tasks in Excel with Visual Basic. I anticipate posting subroutines that I use from time to time, but feel free to comment or contact me with your coding challenges or successes; I may address them in a future post as well.

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