Month: January 2023

Estate Planning, Halacha and the Jewish Law of Inheritance

Estate Planning, Halacha and the Jewish Law of Inheritance

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The question of whether wills are recognized by Halacha involves some of the fundamental concepts of Halacha (Jewish law) under a secular legal system. Rabbinic responsa regarding specific conflicts between the Jewish Law of Inheritance and the law of the land date back at least 700 years to a famous responsum by the Rashba (Rabbi Shelomo ben Aderet), and likely much earlier than that. The Halachic discussions continue today. One notable work dealing with the challenges of preparing a modern estate plan which conforms to Halacha is The Jewish Law of Inheritance, the final work by Dayan Dr. Isidor Grunfeld of the London Beth Din (Jewish court).

Here’s a quick overview of the issue:

There are two distinct questions regarding the Halakhic status of wills and trusts. First, are wills and trusts recognized as valid instruments by Jewish law? Second, if they are, or if estate plans can be made to be Halakhically valid, should they be used to leave property to someone other than those entitled to inherit under the Jewish Law of Inheritance?

Many, if not most, leading Halachic authorities throughout history consider a will to be an invalid document where it contradicts the order of succession laid out by the Torah. This is because both the will and the Jewish Law of Inheritance become effective at the same instant — the moment the testator (the person making the will) dies. According to these opinions, the Jewish Law of Inheritance prevails and the will is ignored. In fact, according to many opinions, simply executing a will is prohibited as a diversion of assets from the rightful Halachic heirs (the Talmudic prohibition of ha’avarat nahala) in a manner enforceable in a secular court.

A common solution to the problem is for the testator to separately sign a note of indebtedness to the non-Halachic heirs in an amount in excess of the estate. The note states that the debt is satisfied if the halachic heirs accept the terms of the will, essentially forcing the Halachic heirs to choose between the will and the note, with the will obviously being the better alternative for the Halachic heirs. Halacha allows a debtor to create an enforceable debt without an underlying reason for the debt. The note probably has no validity in a U.S. court.

There are many other related Halakhic issues to deal with. Does dina demalkhuta dina (the law of the land is the law of the Torah), itself a complex question, apply to the Jewish Law of Inheritance? While one can distribute estate assets during life by giving gifts, according to many opinions such distributions may be limited to assets already owned by the person making gifts. Furthermore, regardless of whether the methods are Halachically sanctioned, at what point does providing for non-Halachic heirs rise to the level of diversion of assets?

I’d be happy to discuss this topic further, so long as it is understood that there are divergent opinions at every step of the way, and that one must consult a Halachic expert for a practical application of these laws.

More to read: How to Work with a Buyer’s Agent in Brisbane

Estate Tax: The Baucus Proposal

Estate Tax: The Baucus Proposal

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Senate Finance Committee Chairman Max Baucus (D-Mont.) recently announced proposed legislation that would amend the tax code. Among other provisions, the bill, known as “The Taxpayer Certainty and Relief Act of 2009,” (S. 722) would implement some much-discussed and anticipated changes to the federal gift and estate tax law.

The last major change to the federal gift and estate tax law was the Economic Growth and Tax Relief Reconciliation Act of 2001. A basic summary of the current law and the changes proposed by Senator Baucus, as provided by the AALU, is as follows:

Under current law, U.S. citizens and residents must pay taxes on transfers of property both during life and at death. These taxes are due under three separate tax systems: the estate tax, the generation skipping transfer tax, and the gift tax. Currently, the top tax rate for all three taxes is 45%. Both the estate and generation-skipping transfer taxes currently have a $3.5 million exemption for individuals ($7 million for couples). The gift tax has an exemption of $1 million ($2 million for couples). For the 2010 tax year, the estate and generation skipping transfer taxes are repealed. In the same year, the gift tax rate will fall to 35%. In 2011, the estate, generation skipping transfer, and gift taxes are scheduled to revert back to pre-2001 levels, with an exemption of $1 million, a 55% rate, and a 5% surtax on large estates.

The proposal would make permanent the 2009 estate, gift, and generation skipping transfer tax laws going forward and index the exemption amount. The proposal would also reunify the estate and gift taxes. In addition, the proposal would allow portability of exemption for spouses. Finally, the proposal would increase the amount available under the special use valuation revaluation to equal the estate tax exemption. (AALU Washington Report, 3/26/2009)

In other words, as proposed, there would be no estate tax repeal for 2010. Instead, the estate tax exemption would remain at $3.5 million. A maximum tax rate of 45% would also continue into 2010. In addition, beginning in 2011, the exemption would be pegged to inflation. So, for example, a 3% CPI increase in 2010 would result in a $3,610,000 exemption for 2011.

Under current law, the estate tax exemption for 2009 is $3.5 million, but the gift tax exemption is still only $1 million. Gifts that do not qualify for the annual gift tax exclusion use the lifetime gift tax exemption. The proposed legislation would reunify gift and estate tax by increasing the gift tax exemption to the same level as the estate tax.

The proposed portability of exemption for spouses would preserve the exemption of the first spouse to die, even where the exemption amount was left outright to the surviving spouse. Under current law, couples who together have assets over $3.5 million would have to create a trust (such as a credit shelter trust) to preserve the exemption following the first spouse’s death. Under the proposed legislation, however, the estate of the first spouse to die can elect on the estate tax return to preserve any unused portion of the exemption.

A few more points about the portability proposal:

If the proposed bill becomes law, it seems that it would make sense to file a federal estate tax return even for small estates, since by doing so an unused spousal exemption can be preserved.

The proposed bill allows a surviving spouse to use the aggregate unused exemptions of all marriages, but unused exemptions cannot exceed the basic exclusion amount applicable at the time the surviving spouse dies. This prevents the accumulation of unused spousal exemptions from multiple marriages.

As Greg Herman-Giddens of the North Carolina Estate Planning Blog and others have pointed out, the proposal wouldn’t make credit shelter trusts a thing of the past, since a credit shelter trust also protects the growth of the trust assets from being taxed in the survivor’s estate. A credit shelter trust can also be used to protect assets from creditors and future spouses.

Beyond that, the portability proposal raises a whole new set of potential issues, especially with regard to estate planning for a surviving spouse in a second or third marriage whose estate can potentially benefit from the unused exemption of a previous deceased spouse.

The Baucus proposal is currently in the Senate Finance Committee. To become law, it would still have to survive the committee, pass votes in both houses of Congress and be signed by the President.