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Planning Correctly for your Incapacity and Death

January 19th, 2012

How to Prepare for Your Incapacity

Understandably, most of us do not like to think about a time in our life when we might not be able to make our own decisions. However, it is important to plan for this event because it is likely to occur to you or to someone you love.  In the event that you do not plan for your incapacity, you will have to have someone appointed to act for you in a public Probate Court case.

In order to prepare for your incapacity, it is important to meet with an estate planning lawyer to execute a Durable Power of Attorney, Healthcare Power of Attorney and Living Will.  The Durable Power of Attorney allows you to appoint an agent to make legal and financial decisions for you, while the Healthcare Power of Attorney allows you to appoint an agent to make healthcare decisions for you.  The Living Will, also known as “A Declaration for a Natural Death,” is a directive from you to your doctor instructing them to remove life support if you are in one of two circumstances:  (1) if you are in a permanent coma or (2) if you have a condition that is terminal and you are likely to die within a relatively short period of time; and that the treatment only prolongs the dying process.

Never use joint ownership as a way to allow someone to act for you.  For example, don’t list someone else as a joint owner of your bank account so that they can sign your checks.  Instead, you should name that trusted person as your Agent under your Durable Power of Attorney.  If you substitute joint ownership, then that checking account will automatically pass to the joint owner at your death.  I also recommend naming one person to act for you at any given time.  Having multiple agents causes confusion and is overly burdensome in most instances.

In addition, you must ensure that your Durable Power of Attorney contains important provisions.  Your Durable Power of Attorney must contain language that states the power survives your incapacity – that’s what makes it “durable.”  Without this language, the power will end when you become incapacitated. It’s also important to think about whether or not your agent will need to provide for your spouse if you become incapacitated.  Without specific language, your agent will not have the power to use your assets for anyone but you.  Another consideration is whether or not it is appropriate for your Durable Power of Attorney to contain gifting authorizations.  Finally, your Durable Power of Attorney must be recorded with the Register of Deeds in the County in which you reside in order to be valid upon your incapacity.

In order to name an agent to make healthcare decisions, you must execute a Healthcare Power of Attorney.  That document is a state statutory form on which you must initial options that provide guidance to your agent.  It is important to review your Healthcare Power of Attorney to ensure that you have given your agent full discretion to make decisions for you.  In addition, it is essential to have a conversation with your agent or agents regarding your wishes in the event of your incapacity.

How to Prepare to Die Correctly

When a person passes away is not the time to discover that they did not have a plan; that time is emotional enough without the unnecessary complications of trying to discover their intentions.  Often, these complications could have been avoided with a little planning.  I recommend that you meet with an estate planning lawyer to execute a Will or Trust and keep it updated by reviewing those documents with your lawyer every three to five years.

Your estate will probably contain assets as large as a parcel of real estate and as small as a set of salt and pepper shakers.  And, perhaps, the salt and pepper shakers will cause the largest problem.  Most families have that one piece of furniture or jewelry in which all of the beneficiaries have an interest.  In order to cause the least amount of strife, I recommend completing a Personal Property Memo, leaving certain items of tangible personal property to specific people.  This memo can include the disposition of assets except for real estate, cash, and stocks and bonds.   In addition, you can complete it without a lawyer once your Will is executed, because it only needs your signature – no witness, no notary.

Another instruction that is helpful is to leave a list of your assets and advisors to give your Personal Representative a place to start.  You don’t have to give your Personal Representative copies of your documents, but it is helpful to tell them where they are located.  It will be very helpful if your Personal Representative can contact your accountant, estate planning lawyer and other agents.

You may also want to preplan your funeral or memorial arrangements to avoid conflict upon your death.  If you do not prepay with a funeral home, I recommend that you at least inform your family of your wishes in a separate document from your Will.  If you put these types of preferences in your Will, it is likely that your instructions won’t be found until after your funeral.

To create a streamlined administration after your death you may want to consider avoiding probate.  Most of the general population believes that probate administration should be avoided at all costs.  While I do not believe that to be true in South Carolina, there are less administrative filings in a Trust Administration than in a Probate Administration.  Please be aware, however, that if you are not careful as to the titling of each asset, you may end up with both a Trust Administration and Probate Administration.  If you truly want to avoid probate, you can do so by creating a Revocable Trust or by titling assets with Payable on Death designations.  If you are one of the few who do not believe probate should be avoided, then you can make it more simple by structuring your Will in such a way as to qualify for a summary procedure in Probate Court.  A summary procedure is shorter and can be fairly easy to qualify for in the right circumstances. 

Living and dying correctly is complicated and requires advance planning. I recommend that you meet with an estate planning lawyer to determine which path is right for you. I would be glad to assist you, please call or email for a free consultation.

Lessons from Celebrity Estate Planning

December 7th, 2011


Let’s face it, celebrities aren’t always the best role models, but there are many lessons to be learned from their mistakes, and sometimes, they actually get it right.  I spoke to Nat & Curtis today on WLTX regarding estate planning.  Here is a link.







Funding a Revocable or Living Trust

Michael Jackson died June 25, 2009 and it was immediately apparent that his family members and the executors of his estate had adverse interests.  Recently, it was announced that Jackson’s Trust would be funded with $30 million; however, this does not mean that these funds will now be distributed to his family.  Forbes has announced that Jackson’s estate is the top earning estate of a deceased celebrity this year, earning $170 million in the past 12 months.  However, Jackson’s family members have not benefited from his celebrity wealth since his death; except that their living expenses have been paid.  Now that the Jackson Trust will be funded, the Trustees will be able to distribute funds to Katherine Jackson and his three children in accordance with the terms of the trust.

Jackson created his Revocable Trust (also known as a Living Trust) during his lifetime, but he neglected to transfer his assets to it.  If he had, then his estate would have avoided probate, ensuring that the details of his estate remained private and avoiding the cost and difficulty of probate administration.  In South Carolina, the probate court only charges a fee of ¼ of one percent of the assets that pass through probate, but other states have much higher probate court costs.

Keep in mind, Farrah Fawcett also died in 2009, but what have we heard about her estate?

Keeping Your Estate Plan Current

Amy Winehouse died this year at the young age of 27.  Her estate has been reported in varying amounts ranging from $15 to 30 million.  Winehouse had divorced her husband, Blake Fielder-Civil in 2009, and he is currently in prison for burglary and related crimes.  It is also rumored that he is to blame for her drug use.  One of the main concerns that arose after Winehouse’s death was that Fielder-Civil would manage to inherit her wealth.  In August, it was reported that Winehouse had updated her estate plan to ensure that her estate passed to her family.

It is important to update your estate plan and beneficiary designations on your life insurance and retirement accounts whenever a significant change in your life occurs.  Winehouse is proof that tragedy can strike at any age and reminds us that having a will is not just for more mature, experienced people.  Fortunately, Winehouse was a great role model for realizing the importance of having a will and keeping her plan current.

Kim Kardashian’s second marriage was a grand affair, but only lasted 72 days.  While the rumors are swirling about whether the wedding was a publicity stunt, let’s assume that Kim and Kris believed, like most engaged couples, that this marriage was forever.  When a couple gets married, it is important for each of them to sign new Wills, Durable Powers of Attorney and Healthcare Powers of Attorney to avoid laws like the omitted spouse’s share.  No matter how short the marriage, when you get married and do not sign a new will, your surviving spouse may petition the probate court for one-half of the estate at your death.

Speaking of Separation

Kim Kardashian’s short marriage also reminds us that once a couple has determined that the marriage is not going to work, the estate planning documents need to be updated once again, prior to the final divorce decree.  In South Carolina, a couple must endure a separation period of one year in order to obtain that final decree.  During that time, a surviving spouse is entitled to the elective share.  The elective share is the right of every surviving spouse to inherit one-third of the estate, and this elective share does not terminate until the final divorce decree is issued.  If Kim were to die during the separation period, would she want Kris to inherit even one-third of her estate?  I seriously doubt it – and most other people wouldn’t either.

Worse yet – what if your ex-spouse continues to have the power to make end of life decisions for you? You also need to consider changing your agents named under your Durable Power of Attorney and Healthcare Power of Attorney.  This happened to Gary Coleman, who divorced his spouse in 2008, as we all watched on an episode of “Divorce Court.”  His ex-wife, Shannon Price, who has insisted that they still considered themselves to be happily married despite the divorce, pulled the plug after Coleman sustained a head injury from a fall down some stairs.  Did Coleman want Price to continue to make healthcare decisions for him?  If he had signed a new Healthcare Power of Attorney, we would have known.

The Truth is Stranger Than Fiction (and Sometimes Celebrities)

I have been practicing in estate planning and probate administration for the last 10 years and, in that time, I have heard a lot of scary and interesting stories from celebrities, clients and friends.  I know that you all share these stories at your holiday gatherings too – they are really interesting to watch from afar, aren’t they?  Try using these celebrity stories this year to ensure that your family and friends don’t make these mistakes.

The Importance of Estate Planning

December 7th, 2011

Still Not Convinced You Need a Will?

Did you know that the most popular estate plan in America is to do nothing?  Perhaps it is because we don’t like to think about our mortality, but approximately 70% of people in the United States do not have a will.  The foundation of an estate plan is built with three documents:  (1) Last Will and Testament, (2) Durable Power of Attorney and (3) Advanced Healthcare Directives.  While a will controls how the assets will be maintained and distributed after death, a Durable Power of Attorney allows you to appoint someone as your agent to make financial decisions for you and a Durable Healthcare Power of Attorney allows you to appoint someone as your agent to make health care decisions for you in the event of your incapacity.

Intestate Succession, the Elective Share & Omitted Shares

If you do not have a will, your estate will be disposed of by the laws of your state of residence.  Dying without a will is called dying “intestate” and believe me, it is as painful as it sounds.  Under the laws of South Carolina, if you are married and have children, then your estate is split 1/2 to your spouse, and 1/2 among your children.  If those children are minors, then the property cannot be transferred without a guardianship and conservatorship hearing in the probate court, an invasive and expensive procedure that could have been avoided.  Having a will is also the only way for you to leave a portion of your estate to friends or charity.

If you are married, you must leave one-third of your estate to your surviving spouse or they can petition your estate for that share.  This is called the elective share and can only be avoided by executing an elective share waiver or prenuptial agreement.

If you made a will, and later got married, or had children who were not provided for in the original will, then your omitted spouse or child can petition your estate for their share.  To avoid this result, you should update your will when you make any life change.  Don’t forget to review the beneficiaries of your life insurance and retirement plans as well – those beneficiary designations control no matter what your will provides.

Issues with Joint Ownership

Many people think that a good will substitute is to add their spouse or children onto the deed to their house and their bank accounts.  This action constitutes a gift to the spouse or child.  Generally, at the first death between spouses, this isn’t a problem, but if the surviving spouse adds the children, it can become a big problem.  First of all, the gift tax exemption this year is $13,000, so if the gift is in excess of that amount, then a gift tax return must be filed.  Second of all, if the surviving spouse has more than one child, but only one is named on the bank accounts (generally, because that child is the one helping to write checks and pay bills), then those bank accounts pass automatically to that child.  The will cannot control how the joint accounts pass at death.  Most of my clients tell me that that child will “do the right thing” by transferring money to the other children, but if the bank accounts have any significant value, then we run into the same gift tax problem mentioned above.  The worst plan is one that causes more problems than it solves, especially when it causes taxes that would not have been due otherwise. Joint ownership is no substitute for estate planning.  What if the child you added to your bank accounts or house gets into creditor problems or gets a divorce?  Those assets would be subject to the claims of the child.  You can achieve the same management objective with a Durable Power of Attorney.

Estate planning is important; it is an investment in your legacy.  These days, the stock market and economy are uncertain, but I promise that an investment in your estate planning will hold its value for years to come.

House Votes to Limit GRATs

April 5th, 2010

On March 25, 2010, the House of Representatives passed the “Small Business and Infrastructure Jobs Tax Act of 2010” (H.R. 4849). Section 307 of this bill would impose restrictions on the use of a grantor retained annuity trust (GRAT), including a requirement that a GRAT have a minimum term of ten years. This is adapted from a recommendation in the Obama Administration’s budget proposals for fiscal 2011 (page 126) and is included as a revenue raiser to help offset some of the tax cuts in the bill. It is estimated to raise approximately $800 million over the first five years and $4.45 billion over ten years. The GRAT provision is the only transfer tax provision in the House bill.
The Use of GRATs in Estate Planning
A GRAT is often a useful and tax-efficient technique for transferring to children property that the transferor expects to appreciate in value. In taking advantage of this technique, the transferor (the “grantor” of the trust) creates an irrevocable trust, places property into the trust as a gift, and retains the right to a fixed payment each year until the GRAT term ends. Often the payments are described as percentages of the initial fair market value of the property transferred to the GRAT, and often those payments increase each year in order to reduce the amount of the taxable gift and to keep the largest amount of the appreciating assets in the GRAT as long as possible. The maximum increase allowed each year is 20 percent. After the GRAT term ends, the remainder interest typically passes to the transferor’s children or continues in trust for the transferor’s children. (A GRAT is not as effective as other techniques for passing property to generations younger than the transferor’s children and typically is not used for generation-skipping transfers because of possible adverse generation-skipping transfer tax consequences.)
The initial transfer to the GRAT is treated as a taxable gift of the remainder interest, equal to the current value of the property placed in the GRAT minus the calculated present value of the annuity payments retained by the transferor. That present value is calculated with reference to the term of the GRAT, the amount of the payments, and a discount or “hurdle” rate derived from market interest rates and published monthly by the Internal Revenue Service. Usually the term and payments are selected so that the transfer produces a small taxable gift.

An Example of the Mathematics of a GRAT
For example, for this month and next month, the published discount (hurdle) rate (often called the “7520 rate,” after the section of the Internal Revenue Code that sets forth the applicable valuation rules) is 3.2 percent. If someone places property with a value of $1,000 into a two-year GRAT and retains annuity payments of 47.7 percent at the end of the first year and 57.24 percent (a 20 percent increase) at the end of the second year, the calculated taxable gift is only 35 cents. If the property grows in value at an even annual rate of exactly 3.2 percent, which is what the valuation rules assume, the $1,000 will grow to $1,032 the first year, and the $477 annuity payment will leave a balance of $555. Then the $555 will grow to $572.76 the second year, and the $572.40 annuity payment will leave a balance of 36 cents to pass to the transferor’s children (which corresponds to the initial taxable gift of only 35 cents).
While no one would go to this trouble to give their children 36 cents, the GRAT can work powerfully when the property outperforms the published discount rate. For example, if the $1,000 asset grows at an annual rate of 10 percent rather than 3.2 percent, it will grow to $1,100 the first year, and the $477 annuity payment will leave a balance of $623, which will grow to $685.30 the second year, and the $572.40 annuity payment will leave a balance of $112.90 for the transferor’s children. That is $112.90 in the children’s hands that was treated as a taxable gift of 35 cents. Add some zeros and make it an initial transfer of $1,000,000, and the children receive $112,900 from a taxable gift of approximately $350. That leverage can be increased still further by using a more refined percentage for the first-year annuity payment, such as 47.716 percent, which produces $112,532 for the children with a taxable gift of less than $16. If the property increases in value by 20 percent per year, the children will receive approximately $295,000, and the taxable gift will still be less than $16. Not only are these very good upside results, the taxable gift of only $16 means that the downside – for example, if the property declines in value or grows at less than 3.2 percent – is very small. That is a distinct advantage of using a GRAT.

Significance of the House Action
Offsetting somewhat the benefits of a GRAT is the fact that the transferor must survive the GRAT term for those benefits to be realized. In general, if the transferor dies during the GRAT term, the amount that passes to the transferor’s children will be subject to estate tax. This is the main reason that most GRATs have a very short term, often just two years, although in recent years there has been more use of longer-term GRATs to lock in relatively low interest rates or values.
The principal change to the GRAT rules included in the House-passed bill would require a GRAT to have a term of at least ten years. This would increase the likelihood that the GRAT will “fail” and be subject to estate tax upon the transferor’s death. The House Ways and Means Committee Report (page 55) explicitly states that this change is “designed to introduce additional downside risk to the use of GRATs.”
The House bill would make two other changes to the GRAT rules, requiring that the annuity payment not be reduced from one year to the next during the first ten years and requiring that the taxable gift of the remainder interest at the time of the transfer have “a value greater than zero.” These rules would not particularly change the design of GRATs, but they would discourage improvisations that might otherwise reduce the effect of the mandatory ten-year term.
All in all, the restrictions included in the House bill would still permit the achievement of significant upside benefits from the use of GRATs, while limiting the downside risks. Such legislation would indeed increase the likelihood of the downside event of the transferor’s death during the GRAT term. Nevertheless, as long as the gift tax value at the time of the initial transfer is required only to be “greater than zero” and not any prescribed minimum amount, the downside from the use of the GRAT in that case would still be only the nominal taxable gift, which typically would use only a nominal amount of the transferor’s gift tax exemption.

Prospects for the House-Passed Bill
The House vote on the small business bill was partisan. Only four Republicans voted for it and only seven Democrats voted against it. It goes to the Senate now, where, as we have recently seen, it is hard to pass partisan legislation that often requires 60 votes to be considered. Many give the small business bill little chance in its current form. But the Senate Finance Committee could change the bill to give it more bipartisan appeal, or the Senate leadership could package the bill with other measures that make it harder to ignore. It is also possible that while the small business bill is pending the GRAT provision will be used as a revenue offset in other legislation, including legislation to provide clarity and stability for the estate tax itself.

Effective Date and Recommended Action
The GRAT legislation contained in the small business bill, like the earlier recommendation in the Administration’s budget proposals, states that it will take effect when the President signs it into law. There is no known inclination to change that effective date at this time, but that does not guarantee that the effective date will not be changed. For example, the Senate Finance Committee could report out the bill and change the effective date to the date of its report, allowing no time to react. In any event, if the Senate passes this bill, which is viewed by the Administration and congressional leadership as an important economic initiative, the President might sign it very quickly. Even if the Senate makes changes to the House-passed bill, the House might promptly approve the changes and send the bill to the White House.
While such developments are difficult to predict, the fact remains that this action in the House takes a theoretical proposal to limit GRATs one significant step closer to enactment into law.
GRATs are not for everyone, and there is probably no reason why this pending legislation should encourage someone to create a GRAT who would not otherwise do so. However, for those for whom a GRAT at this time makes sense or those who have a pattern of creating GRATs from time to time, it may now be important to consider acting sooner rather than later to finalize the creating and funding of a GRAT or GRATs. Moreover, even if such restrictions on GRATs become law, there are other planning opportunities available for those for whom age or health suggest a greater likelihood of dying during a ten-year term.

We are available to help with questions about GRATs and other estate planning techniques.
For more background on GRATs, see the article “Overview of Grantor Retained Annuity Trusts (GRATs)” by Dennis I. Belcher and the technical outline “Grantor Retained Annuity Trusts (GRATs) and Sales to Grantor Trusts” by Ronald D. Aucutt.

McGuireWoods Private Wealth Services
Private Wealth Services is ranked by Chambers and Partners, the international rating service for attorneys, as one of two top-band private wealth services practice groups in the country, with professionals in several U.S. cities and in London, dedicated to estate planning and the analysis of related tax and fiduciary issues.
McGuireWoods Fiduciary Advisory Services
Fiduciary Advisory Services advises financial institutions and other clients about planning, tax, and fiduciary matters. This includes advising executors and trustees in managing risks, avoiding litigation, and handling litigation when it does arise.
Ronald D. Aucutt

Young Leaders Society Presentation March 23rd!

March 17th, 2010

Rachael Ray Talks about Estate Planning

February 2nd, 2010

“And when you sit down to write your estate plan, you’re gonna need yourself a little snack!”  Rachael Ray sits with the authors of Trial and Heir to discuss the importance of estate planning.

Life Insurance Trusts in 2010

January 17th, 2010

by McGuireWoods Private Wealth Management

An irrevocable life insurance trust is an estate planning tool commonly used to prevent life insurance proceeds from being subject to estate tax at the death of the insured. In today’s unpredictable legislative environment, use of standard funding techniques for insurance trusts may have unknown and unintended generation-skipping transfer (GST) tax consequences.

Absent legislation from Congress, the GST tax, like the estate tax, “shall not apply to generation-skipping transfers after Dec. 31, 2009.” The GST tax is scheduled to return Jan. 1, 2011. For grantors and trustees funding or administering life insurance trusts during 2010 and beyond, the temporary suspension of the GST tax regime raises significant questions regarding the best and safest way to pay insurance premiums.

When premium levels permit, gifts from the grantor is a common method of funding the necessary insurance premiums. If such gifts are subject to so-called Crummey rights of withdrawal, they may qualify for the gift tax annual exclusion and not be subject to gift tax. In this respect, 2010 is the same as previous years. The significant difference that arises in 2010 is that because the GST tax does not apply to generation-skipping transfers, including some transfers to trusts, it therefore is not always clear if and how GST exemption can be allocated to those transfers.

In that case, when 2011 arrives and the GST tax returns, the trust may contain assets to which no GST tax exemption was allocated. A trust that was intended to be wholly exempt from GST tax may now be only partially exempt unless a late allocation of GST exemption is made on or after Jan. 1, 2011. A risk in waiting to make a late allocation is that the insured may die in the interim.

This result is unclear, and regardless of the result under current law, Congress may legislatively provide, clarify, or change the treatment of such transfers during 2010. If congressional action is retroactive (and survives constitutional challenge), it is possible that allocations may be made (or may be automatic) as though the lapse in the estate and GST taxes had never occurred.

During this period of uncertainty, one solution is for the trustee to borrow funds from the grantor or a third party to use to pay insurance premiums. If legislation during 2010 reinstates the GST tax or otherwise clarifies these issues for this year, the grantor can make gifts to the trust later in 2010 for the trust to use to pay off the loan. If no legislation is passed during 2010, a loan to the trust eliminates the concern about the trust’s fully exempt status for GST tax purposes for 2011 and beyond, and the grantor may make gifts to the trust in 2011 for the trust to use to pay off the loan. To avoid gift implications, any loan from the grantor or a family member must bear interest at no less than the Applicable Federal Rate as announced by the IRS and in effect at the time of the loan.

Although loans to fund life insurance premiums may be classified as a “split-dollar arrangement,” loans described above should not cause concern as long as the terms of the promissory note are respected and the trust has the ability to pay the principal and interest when due.

Another possible solution is to skip paying premiums during 2010 by using a portion of the policy’s existing cash value to maintain the policy, and then in 2011 to reinstitute the gift program. Life insurance advisors should be consulted before making a decision of this nature.

If loans or policy values instead of gifts are used in 2010 to maintain the insurance, attention should be given to other possible uses of the 2010 gift tax annual exclusions.

The Current Uncertain Estate Tax Environment

January 9th, 2010

By Ron Alcutt, McGuireWoods, LLP Private Wealth Services Group

The 2010 Estate Tax Earthquake

Because Congress did not act in 2009 to preserve the federal estate and generation-skipping transfer (“GST”) taxes in 2010, the federal estate, gift, and GST taxes, which are sometimes collectively referred to as transfer taxes, have changed greatly from what they were in 2009.  As a result of the provisions of the 2001 Tax Act, the official title of which is the Economic Growth and Tax Relief Reconciliation Act of 2001 and which is sometimes referred to as “EGTRRA,” the estate and GST taxes have been repealed for one year while the gift tax remains in place with a $1 million exemption and 35% maximum rate and a “modified carryover basis” regime has been implemented to generally deny a step-up in basis of appreciated assets at death.  Unless Congress acts, the estate, gift, and GST taxes as they existed before 2002 will be reinstated in 2011 with a 55% rate (with a 5% surcharge on estates or cumulative gifts between $10 million and $17.184 million), a $1 million exemption for lifetime and testamentary transfers, and a $1 million exemption from GST tax (as indexed for inflation since 1999).  Because of this changed and unpredictable environment, clients and their advisors now face significant uncertainty in planning the gratuitous transfer of assets given the current state of transfer tax exemptions and rates.

What Will Congress Do?

It is impossible in this time of increased polarization and partisanship in Congress to predict if and when Congress will act to eliminate the uncertainty and disparity in the transfer tax laws.  If Congress acts, it is impossible to predict the effective date of the legislation, specifically whether the legislation will be retroactive to January 1, 2010 or effective as of the date of introduction or enactment.  If Congress acts and the legislation is retroactive, there undoubtedly will be a constitutional challenge to the retroactive application of the legislation.  Predicting the outcome of such a challenge is impossible.

Congressional action could involve any of the following possibilities:

  • Congress could enact transfer tax legislation, effective retroactively to January 1 2010, and either extend the 2009 transfer tax rates and exemptions or enact new rates and exemptions.
  • Congress could enact transfer tax legislation, effective as of the date of enactment, introduction, or some other action, and either extend the 2009 transfer tax rates and exemptions or enact new rates and exemptions.
  • Congress could continue the deadlock and not enact any legislation so the above transfer tax rates and exemptions will remain in place in 2010 and 2011 and beyond.

What Must We Do? Review of Estate Plans

Congress’s inaction may mean that some estate plans no longer meet the client’s objectives and goals.  In particular plans based on formulas or decisions tied to transfer taxes may be significantly impacted by the current state of flux.  For example, if a married client directs in the client’s will or trust that property equal to the estate tax exemption is distributed to the client’s children to the exclusion of the client’s spouse or that property equal to the GST tax exemption is distributed to the client’s grandchildren, the disposition of the client’s assets will vary significantly depending on the year of the client’s death and whether and in what manner Congress acts.

Also, many wealthy individuals have estate plans that use charitable gifts or techniques, such as charitable reminder trusts or charitable lead trusts that are designed to take advantage of the federal estate tax charitable deduction with the intention of lowering or eliminating the estate tax associated with a particular vehicle or plan.

There are other situations where a client’s estate plan will no longer accomplish the client’s estate planning objectives depending on when and how Congress acts.  Accordingly, clients and their advisors should review their estate planning documents to determine whether changes are in order or necessary to accomplish the client’s planning objectives.  Also, clients should monitor activity in Congress to see if Congress quickly clears up this mess and thereby eliminates the need for changes.

If Congress fails to act quickly and there is a carryover basis regime for part or all of 2010, estate plans must be reviewed to make sure that adequate provisions have been or are made to take advantage of the adjustments available to reduce the impact on a decedent’s estate because the appreciated assets it holds no longer receive a step-up in basis to the fair market value on the date of death.

Welcome to Repeal of the Estate Tax?

December 20th, 2009

Late in the evening of December 16, 2009, the United States House of Representatives adjourned for the Christmas Break and is not scheduled to reconvene until January 2010. This means the estate tax and the generation-skipping transfer (GST) tax will be repealed as of January 1, 2010, because the Senate, although still is session, has yet to pass any legislation on retaining the estate tax in 2010. On December 3, the House passed H.R. 4154 which would permanently extend the current estate tax law with a $3.5 million exemption and 45% rate for estate, gift, and GST tax purposes. Although the Democrats subsequently tried to move a two-month extension of the present transfer taxes in the Senate, it was unable to find the 60 votes necessary for the bill to be considered. Most, if not all, of the Republican Senators and some Democratic Senators (if they cannot achieve full repeal) would like to see an increased exemption, such as $5 million, and a lower rate, such as 35%. Even if the Senate acts before the end of the year (which is unlikely at best), the House would not be in session to consider any bill passed by the Senate. The only way that legislation could be enacted this year is for the Senate to pass H.R. 4154 without any changes to the House bill. Given the Senate’s refusal to pass a two month extension, this seems highly unlikely.

Many believe that legislation to permanently fix the estate and GST taxes will be introduced in Congress early next year. However, because the current estate tax law will expire January 1, 2010, that expiration will create at least temporary uncertainty and confusion for many individuals in planning their estates. The longer that Congress delays in enacting a solution, the greater the uncertainty and confusion.

There are three possible resolutions to the current situation. First, if Congress fails to act next year, the estate and GST tax regime in place prior to 2002 with a 55% rate, a 5% surcharge on estates between $10,000,000 and $17,184,000, and a $1 million exemption will be reinstated on January 1, 2011. During 2010, the gift tax will still be in place with a $1 million exemption but a lower 35% rate.

Another possibly dramatic consequence of a failure by Congress to act next year will be the substitution of a carryover basis regime for the repealed estate tax. Under current law, a decedent’s heirs receive assets with basis for computing capital gains taxes equal to the fair market value of the decedent’s assets on the date of death. On the assumption that a decedent’s assets will have increased in value between the dates of acquisition by the decedent and the date of the decedent’s death, this basis adjustment is usually referred to as a “basis step-up.” In 2010, if Congress fails to take action, the step-up in basis goes away for one year and instead the heirs of a decedent take the decedent’s basis in the property. This is often referred to as a “carryover basis.” There are, however two major exceptions. The assets of every decedent will be eligible for a $1.3 million increase in basis. In addition, assets passing to the surviving spouse of a decedent will get an additional $3 million increase in basis. These exceptions will prevent the imposition of carryover basis from affecting many decedents, but others will be affected.

The second possible resolution is a temporary extension of some specified duration of the current law with the $3.5 million exemption and 45% rate.

The third possible resolution is for Congress to enact some permanent fix for the estate tax and the GST tax that will be effective in 2010 and beyond. Either a temporary or permanent fix will probably require 60 Senators agreeing on the fix with the likely areas of disagreement being the amount of the exemption and the rate of tax.

If legislation is passed in 2010, one concern of some observers is whether any legislation enacted next year to temporarily or permanently fix the estate and GST taxes can be effective retroactively back to January 1, 2010. For example, if Congress passed new estate tax legislation in February 2010 and stated that the effective date is January 1, 2010, would an individual who died in January 2010 be subject to the retroactively imposed estate tax or would that individual’s estate escape estate tax but be subject to additional capital gains tax because of carryover basis? There is no clear consensus on this and, if this situation occurs, there undoubtedly will be litigation. Some people may be tempted in 2010 to take advantage of the lower 35% rate for gifts (particularly those to “dynasty” trusts) under the current law during the period before Congress acts (assuming that Congress acts). Because there will be no GST Tax during this window (assuming that any fix is not retroactive), one could, for example, gift unlimited amounts to a trust for children, grandchildren, and more remote descendants without GST tax consequences (although gift tax would have to be paid once the $1 million exemption is exceeded, although it would be at a lower 35% rate).

As can be seen, the legislative status of the estate and GST taxes is cloudy with no clear resolution currently in sight. Individuals must carefully examine their options in this confusing environment in planning their estates and they should consult with their advisers before taking any steps. Because many estate plans contain formula provisions tied to the marital deduction and to the estate tax and GST exemptions, a careful review of all wills and trusts is appropriate at this time. Advisers need to stay of top of the possible changes in Congress to properly advise their clients. We are closely following the status of the estate tax, gift tax, and GST tax in Congress, and are ready to help individuals and professionals understand and work their way through the current legislative morass to find the appropriate estate planning solutions.


December 10th, 2009

I’ve begun teaching some courses for a company called Surgent McCoy, which specializes in courses for CPAs to get their educational credits.  This November and December, I taught The Complete Trust Workshop and The Complete Guide to Trusts and Estates.  I’ve gotten some great feedback on these courses, see one of the attendee’s blog posts about me, here: