Archive for the ‘Estate Settlement’ category

Basic Estate Planning Video Updated to Reflect ATRA

February 24, 2013

The American Taxpayer Relief Act of 2012 (“ATRA” effective January 1, 2013) will change everything about estate tax planning.  We recently updated our Basic Estate Planning Video to reflect ATRA and posted it to YouTube.

Background

April 30, 2013 (Updated April 20, 2015)

We offer seminars to our clients, their advisors, and other friends of the firm, every year.  One of the most popular has been our Basic Estate Planning Seminar.  On March 14, 2013, we offered our Basic Estate Planning seminar at the Maron Hotel, Danbury, Connecticut.  The seminar covered the topics mentioned below.

Those who could not attend the seminar may be interested in taking a look at the Basic Estate Planning video that we recently finished updating to reflect the recently enacted American Taxpayer Relief Act of 2012 (effective January 1, 2013).

The presentation is in 15 parts.  Click on the red  “Basic Estate Planning after ATRA (15 Parts)”  heading below and then click “Play All” under “Basic Estate Planning” at the top of the YouTube page.

Basic Estate Planning after ATRA (15 Parts)

We describe each of the parts below with an individual link to each one. 

Part 1:  Introduction.  Wills and probate property vs. nonprobate property.

Part 2: Beneficiaries, mistakes with nonprobate property, trust basics, guardian appointments, life insurance beneficiary designations, and estate taxes.

Part 3:  Wills, the estate taxation of life insurance death benefits, tax issues and asset protection issues relating to Wills, and disclaimer Wills.

Part 4: Formula marital deduction Wills, exemption trusts, risk of disinheriting the surviving spouse as estate tax exemptions increase, the portable estate tax exemption, and asset protection bypass trusts.  

Part 5:  Formula marital deduction Wills (and exemption trusts) vs. disclaimer Wills (and disclaimer trusts), and common estate planning mistakes.

Part 6:  Common estate planning mistakes continued, the duties of an Executor, the duties of the Trustee, the duties of a guardian, planning for post-death cash needs, and the generation skipping tax.

Part 7: Retirement plan accounts (IRAs, 401(k) plans, 403(b) accounts, etc.), estate taxation on retirement plan accounts, the risk of a circular tax on tax problem at death of account owner, life insurance and irrevocable life insurance trusts as a solution.

Part 8: Retirement plan accounts and related income tax issues, effects of beneficiary designations on deferral periods, spouse as beneficiary and tax deferred rollovers, required minimum distributions, and tax treatment of inherited IRAs, and the five year payout rule.

Part 9: Revocable living trusts, the living trust as a Will substitute, probate avoidance, planning for incapacity, and establishing a revocable living trust.

Part 10:  Comparison of revocable living trust plan with non-living-trust plan, treatment of lifetime issues, powers of attorney as an alternative to the revocable living trust, and what it means to avoid probate.

Part 11:  Comparison continued, avoiding ancillary probate in other states where real property is located, creditors’ claims and safe harbors for the Executor, and income and estate taxes.

Part 12:  Comparison (continued), accounting requirements, releases from liability, continuing trusts and continuing probate court jurisdiction, reasons for considering revocable living trusts, management during incapacity, and real property in other jurisdictions.

Part 13:  Reasons for considering a revocable living trust (continued), controversial estate plans, probate notice requirements, disruption of support for third parties, probate and related delays, simplifying estate settlement for survivors, nonreasons for considering revocable living trusts, the living trust as tax neutral, and probate court fees.


Part 14: Gift planning, gift and estate tax exemptions, exclusions for small gifts, gifts to education funds (529 plans), exclusions for qualified tuition and medical costs, gift tax marital deductions,  gifts to U.S. citizen spouse, and gifts to noncitizen spouse.

Part 15: Gifts of life insurance policies, incidents of ownership, irrevocable trusts as owner, three year rule relating to transfers of life insurance policies, and sophisticated gift techniques (qualified personal residence trusts, grantor retained annuity trusts, valuations for gift tax purposes, gifts to charities and charitable trusts).

 Posted on 2/24/2013 by Richard S. Land, Member, Chipman, Mazzucco, Land & Pennarola, LLC.

 

Notice: To comply with U.S. Treasury Department rules and regulations, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction, tax strategy or other activity.

We frequently post articles relating to estate planning, estate settlement and elder law issues to this blog. We also post notices about our client seminars here. When we do, we send out notices to clients and friends of the firm. If you would like to get our notices, please join our mailing list by clicking below.

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Simplify Your Estate Plan Maybe

January 13, 2013

The recent American Taxpayer Relief Act (effective 1/1/2013) could have been named the Great American Estate Planning Simplification Act. All but the very wealthy could call January 1, 2013, Federal Estate Tax Liberation Day. In other words, all but the very wealthy will be able to rely on simple Wills (Wills that don’t include complicated tax and trust provisions) unless one of the exceptions listed below applies to you.

Exceptions:

(1) You live in a state that still has an estate tax. Connecticut has an estate tax with an “exemption” of $2,000,000 and New York has an estate tax with an exemption of $1,000,000.

(2) Special problems plague your beneficiaries: creditor problems; divorces and troubled marriages; poor judgment; gambling habits; drug dependence; health problems; special needs; and poor financial training, financial skills or lack of interest in financial matters.

(3) A need to plan for long term care, whether at home or in a nursing home, for a surviving spouse or other beneficiary.

(4) Your primary beneficiary is your current spouse from a second marriage and you want to provide for the children of a previous marriage.

(5) Your children or other beneficiaries are too young to handle an inheritance or have special needs to consider.

(6) You have a business which will require management if it is to provide appropriately for your beneficiaries after your death.

(7) You are concerned about the management of your assets for you and your family in the event of your incapacity.

(8) You want to disinherit an undeserving relative or you would like to include provisions in your planning documents that your survivors might consider controversial.

(9) You have difficult-to-manage assets (for example, a closely held business, rental properties, collections of art, antiques and other creative works, weapons, etc.).

(10) You are concerned that your surviving spouse’s remarriage after your death will result in a diversion of your assets away from your children or other intended beneficiaries.

(11) You may be wealthier (for estate tax purposes) than you think you are. To determine the size of your estate, start by counting everything that will pass to others at the time of your death: home, retirement accounts, annuities, IRAs, life insurance, bank accounts, stocks and bonds—everything. Is it over $5,250,000? If so the Great American Estate Planning Simplification Act probably does not apply to you.

(12) You are in a same-sex or other “nontraditional” committed relationship (married or otherwise).

(13) Your estate is increasing and there is a strong possibility that, as a result of your efforts, luck, inflation, additional life insurance, or a combination of such factors, you will join the ranks of the “very wealthy”. In that case, it may be important for your documents to include all the existing tools for effective “post mortem” tax planning. See: It’s Not Too Late (Fixing Your Estate Plan After Your Death).

(14) You want to provide for your grandchildren by bypassing your children to some extent.

(15) You want to provide benefits for your grandchildren in amounts that may exceed one generation skipping tax exemption (currently $5,250,000).

(16) Although disadvantages of probate are often overstated, you nevertheless wish to arrange your affairs to avoid probate.

(17) Unique facts reveal unique problems that often require unique (and perhaps not simple) solutions.

With the above exceptions (and probably others I have not thought of), a simple Will may be all you need.

For those of you who currently have in place more complicated, tax sensitive documents, it may be very important for you immediately to change to something simpler. If the tax provisions in your Will are based on the federal estate tax exemption, failure to change to a simpler Will may result in unnecessary Connecticut or New York estate tax (more than $250,000 for Connecticut residents and more than $400,000 for New York residents) at the time of your death. For more details, see our companion post on this blog here: “New Risks of Unnecessary State Estate Taxes.”

For an excellent summary of the changes resulting from the Act, go to this post prepared by Clearwater, Florida, Attorney Alan Gassmann: Summary of the American Taxpayer Relief Act of 2012.

Posted on 1/13/2012 by Richard S. Land, Member, Chipman, Mazzucco, Land & Pennarola, LLC.

We frequently post articles relating to estate planning, estate settlement and elder law issues to this blog. We also post notices about our client seminars here. When we do, we send out notices to clients and friends of the firm. If you would like to get our notices, please join our mailing list by clicking below.

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Notice: To comply with U.S. Treasury Department rules and regulations, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction, tax strategy or other activity.

Understanding the Probate Process—Probate Basics

July 6, 2012

Many estate planning clients come to us with the same question: “How can my estate avoid probate when I die?”  There is a common misconception among members of our community that probate is an arduous process that will deplete estate assets and should be avoided at all costs.  However, in many cases, the probate process is not much more time consuming or costly than avoiding probate and can provide certain benefits that are unavailable to estates that avoid probate.

When is Probate Necessary?

The first step in understanding the probate process, and when probate is necessary, is to understand the difference between probate property and non-probate property. Probate property is all property which is owned by a decedent, in his or her sole name, and without beneficiary designations.  Non-probate property is all other property owned by a decedent such as joint property, retirement accounts with designated beneficiaries and assets owned by a living trust established by a decedent prior to death.

The following are examples of commonly owned probate property and non-probate property:

     Probate Property:

  • Checking account owned solely by the decedent
  • Vacation home owned solely by decedent
  • Life insurance owned by the decedent with no designated beneficiary
  • Automobile owned solely by the decedent

     Non-Probate Property:

  • Retirement account owned by the decedent payable to the decedent’s surviving spouse
  • Savings account owned jointly by the decedent and the decedent’s surviving spouse
  • Life insurance owned by the decedent, payable to the decedent’s surviving spouse as the designated beneficiary
  • Home owned jointly by the decedent and the decedent’s surviving spouse with rights of survivorship (but if owned jointly as tenants-in-common, the decedent’s half of the home would be probate property)
  • Assets owned by a living trust established by the decedent

When an individual passes away, it is clear who has the authority to access his or her non-probate property.  For example, a joint account owner has access to joint accounts; a designated beneficiary of life insurance has the authority to claim the death benefit; and the Trustee of a living trust has authority to access to the assets owned by the trust.  No one must be appointed by the Probate Court to have such authority.  If the decedent’s estate includes probate property, on the other hand, no one has the authority to access such property and probate becomes necessary.  

The Probate Process

In a nutshell, probate is the process of appointing an Executor (or Administrator, if the decedent did not leave a Will), identifying and collecting a decedent’s property, paying the debts, taxes and expenses of the decedent’s estate, and distributing the remaining property to the beneficiaries of the estate.  

If the decedent left a Will, the process begins by proving the legal validity of the Will and asking the Probate Court to appoint the Executor of the estate.  If the decedent did not leave a Will, the process begins by asking the Court to appoint an Administrator of the estate. Once appointed, pursuant to Connecticut law, the Executor or Administrator will have the duty to complete the following estate settlement steps:

  • Identify the decedent’s property (probate property and non-probate property) and determine the date-of-death value of all such property;
  • Take possession of and safeguard the probate property;
  • Prepare and file an Inventory of all probate property (with date-of-death values) with the Probate Court;
  • Prepare and file the decedent’s final income tax returns;
  • Prepare and file the estate’s income tax returns and the estate tax returns;
  • Identify and pay the claims of creditors, the expenses of estate administration, and taxes;
  • Prepare and file a Return of Claims and List of Notified Creditors with the Probate Court;
  • Prepare and file a Final Account (or, for some estates, a Statement in Lieu of Account) with the Probate Court; and
  • Distribute the remaining property to the beneficiaries of the estate.

The Final Account is a list of all probate property (starting with the Inventory), all income earned on such property (interest, dividends, etc.), all sales, and all debts and expenses paid from the estate.  It also includes a list of assets remaining after all estate obligations have been satisfied and a schedule of proposed distributions of the remaining property to the beneficiaries of the estate.

If the decedent left a Will, the beneficiaries of the estate will be determined according to the terms of the Will.  If the decedent did not leave a Will (i.e. the decedent died “intestate”), the beneficiaries of the estate will be the decedent’s heirs-at-law in accordance with State statutes (for information about intestacy laws in Connecticut, see “I don’t need a Will”).

After the Final Account has been approved and distributions made, the Executor (or Administrator) files a Closing Account with the Probate Court and the probate process is complete.

It is worth noting that, although the steps applicable in each state are analogous, the details (due dates, forms, filing and probate court fees, etc.) can vary significantly from state to state.

Probate Avoidance

Probate can be avoided with various estate planning techniques (a subject for another article).  For some estates, there may be compelling reasons to avoid probate.  You should consult an estate planning attorney to determine whether any such reasons apply to you.  In many cases, however, avoiding probate merely means avoiding the obligation to file certain documents with the Probate Court (such as the Inventory and Final Account) and payment of related filing fees. 

For example, some people avoid probate by establishing living trusts (revocable trusts) and transferring all of their assets to their trust. If a decedent transferred all of his assets to a living trust prior to his death and his estate included no probate assets, probate would not be necessary (barring complicating factors).  Nevertheless, the Trustee of the trust would have an obligation to: (i) identify and take possession of the trust assets (if the Trustee has not already done so), (ii) file income tax and estate tax returns, (iii) identify and pay the debts, taxes and expenses of the decedent’s estate, (iv) prepare an account to present to the beneficiaries of the trust, (v) and distribute trust assets in accordance with the terms of the trust.  In this example, even though the estate avoided probate, the Trustee still has most of the same obligations as the Executor’s obligations outlined above.

Keep in mind that avoiding probate does not mean the estate avoids estate taxes. Estate taxes are based on the value of a decedent’s gross estate which includes probate and non-probate property. Connecticut, in particular, requires all estates to prepare and file a Connecticut estate tax return even if the value of the estate is less than the Connecticut estate tax exemption and no Connecticut estate tax would be due.

In addition, avoiding probate does not mean an estate avoids the Probate Court fee. The Probate Court charges a statutory fee, based on the value of a decedent’s gross estate, which is assessed when the estate tax return is filed.  

Benefits of Probate

The probate process can provide certain benefits and protections that are unavailable to an estate that avoids probate. As discussed above, in Connecticut the Executor or Administrator has a duty to file an Inventory and Final Account with the Probate Court.  The Account should document every penny in and every penny out of the estate.  Probate Court supervision provides extra protection to estate beneficiaries in the event an Executor or Administrator attempts to abuse its power.

Probate Court supervision can also benefit the Executors and Administrators.  Troublesome beneficiaries will have a more difficult time contesting the actions of an Executor or Administrator if the Probate Court has given its “stamp of approval” on the Final Account of the estate.

In addition, probate court procedure limits the time during which creditors of an estate may make a claim for payment by the Executor or Administrator.  When the Executor or Administrator is appointed, the Probate Court publishes notice to creditors notifying them to present their claims to the Executor or Administrator. Creditors have 150 days to present a claim. After that period, if distributions have been made, the Executor or Administrator is free from liability from future creditors.  Without probate, the decedent’s estate is subject to the applicable statute of limitations which range from 2 to 6 years (subject to tolling statutes) depending on the nature of the claim.

[This article is meant to provide a basic overview of the probate process in the context of estate settlement, including some of the potential benefits of probate.  It is not intended to be a complete analysis of the probate process or the pros and cons of probate and probate avoidance.  For questions and detailed legal advice, please contact your attorney.]

Posted on 7/6/2012 by Kasey S. Galner, Associate, Chipman, Mazzucco, Land & Pennarola, LLC.

We frequently post articles relating to estate planning, estate settlement and elder law issues to this blog. We also post notices about our client seminars here. When we do, we send out notices to clients and friends of the firm. If you would like to get our notices, please join our mailing list by clicking below.

 
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Notice: To comply with U.S. Treasury Department rules and regulations, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction, tax strategy or other activity.

Planning Question and Answer Sessions. Please Take This Survey!

May 15, 2012

When Do You Want an Estate Planning Q&A Session?  Please take this survey.

 May 15, 2012.

We recently published a Basic Estate Planning video on YouTube and DVD.  We hope that you will have a chance to see it if you have not already done so.

You can see the YouTube version here:  Basic Estate Planning Screencast on YouTube

We are scheduling group meetings so that interested parties can ask questions related to the subjects in the video.  There will be no charge or obligation. 

Location: Chipman Mazzucco, Attorneys, Matrix Corporate Center, 39 Old Ridgebury Road, Suite D-2, Danbury, Ct. o6810.

We ask you to click on the link below to complete this survey so that we know what will be convenient for you.  It will take only one minute.

Survey Link

 
Thank you for participating in the survey.  It will be a great help to us in our efforts to help you.
 
 
Posted on 5/15/2012 by Richard S. Land, Member, Chipman, Mazzucco, Land & Pennarola, LLC.

Notice: To comply with U.S. Treasury Department rules and regulations, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction, tax strategy or other activity.

We frequently post articles relating to estate planning, estate settlement and elder law issues to this blog. We also post notices about our client seminars here. When we do, we send out notices to clients and friends of the firm. If you would like to get our notices, please join our mailing list by clicking below.

     
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What a Trustee’s Account Looks Like

October 12, 2011

We recently posted an article on standards of conduct that apply to Trustees here: Avoiding the Trustee’s Worst Nightmare.

We also posted a related article on trust administration here: Dreams Come True (Fiduciary Accounting Made Easy?).

Those posts mentioned the Trustee’s duty to account. You can find a sample of a Trustee’s account here: Sample Trustee’s Account.

If you have any questions about fiduciary accounting, give us a call or email us at the email addresses shown below and we will be pleased to help.

Posted on 10/12/2011 by Richard S. Land, Member,  Chipman, Mazzucco, Land & Pennarola, LLC.

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Dreams Come True (Fiduciary Accounting Made Easy?)

September 6, 2011

The words of Joan Lucia, Legal Assistant, CMLP: “I used to prepare estate and trust accounts by hand with an old fashioned calculator, a yellow pad of paper (actually lots of yellow pads of paper) and pencils—lots of pencils and erasers. It took hours upon endless hours to separate income accounts from principal accounts and to make everything balance. We would spend countless hours looking for pennies. When you are trying to prepare an account and it won’t balance, it really consumes you. It’s hard to tear yourself away from the project no matter how uncomfortable and frustrated you become. When DRIPs (dividend reinvestment plans) became common, that just compounded the problem. After the handwritten draft finally balanced, the reams of paper were typed up – not word processed – and another round of time consuming proofing began. What a relief and a sense of accomplishment when we finally got an account to balance and in final form! Really… something to celebrate.”

Much has changed since Joan Lucia took yellow pad and pencils in hand to prepare her first fiduciary account. Now we have computers and software. “What a godsend!” says Joan.

“It still takes a lot of time and effort to prepare a fiduciary account—especially if the account hasn’t been done for a long time. Clients still misplace statements, forget about the old bank accounts, fail to make clear entries in their checkbook ledgers; and clients forget about specific deposits and withdrawals as time passes. The longer it is between accounts the more difficult the project becomes because of lost records and foggy memories. But once I have gathered all the information in an organized way, if I enter the data properly into the software, the software does a great job of creating the separate income and principal accounts we need, and all the other schedules required to provide Trustees, beneficiaries and the Probate Court with a complete picture.”

Even with a great software package, fiduciary accounting requires knowledge of fiduciary accounting rules and experience. For example, even making heads or tails out of statements provided by brokers, banks and investment advisors can be a challenge, especially if that type of thing is new to you.

According to Joan, “Some statements are easier to read than others. Some statements make me feel like I’m reading a foreign language. Almost no statement provides specifics on transactions like sales of fractional shares on mergers, distributions on bankruptcy, etc., so even if all the statements are in order, there is almost always something out of the ordinary to track down. After a while, though, you figure it out. But it seems like every statement, no matter from what company, is very hard on the eyes.”

A lay person who has been appointed Trustee of a trust is tempted to put accounting off. In the long run that will probably result in unnecessary additional time and effort (and expense). And the Trustee can be exposed to a very real risk of personal liability. A Trustee who is not paying proper attention to the income and principal accounts could very easily overpay one class of beneficiaries while shortchanging others. The shortchanged beneficiaries likely will be upset and look for someone (most likely the Trustee) to blame.

We encourage our trust clients to stay on top of the accounting. As each quarterly statement is received, we want to enter the data as soon as possible. That way problems are identified early and questions get answered while memories are fresh.

“Software has made a big difference when it comes to fiduciary accounting,” says Richard Land (Member, CMLP ). “A good software package can be quite expensive but, if you represent enough estates and trusts, and if you have the knowledge and experience required to properly use the software, the investment is well worth it.

“I’ve been involved with fiduciary accounting for almost 30 years now,” says Joan. “I love our current software. I would never want to return to the good old days of yellow pads and pencils…and lots of erasers.”

It’s Not Too Late (Fixing Your Estate Plan After Your Death)

April 4, 2011

Recent state and federal estate tax changes have created difficult tax traps which can be avoided if your survivors take appropriate steps (commonly referred to as “post mortem planning”) after your death.

Post mortem planning not only includes projections of cash needs and identifying problems relating to the disposition of certain assets, it also includes consideration of a variety of estate and income tax elections, generation skipping tax exemption allocations, disclaimers and the division of certain trusts into subtrusts.

To assure that your survivors have the proper tools and authority to adopt an effective post mortem plan, your estate planning documents (your Will and frequently a revocable trust) should include enabling provisions.

For your survivors to benefit from post mortem planning, they (with the help of your advisors) need to review the assets and the relevant documents shortly after your death before they receive any substantial property as your beneficiary. Failure to satisfy technical requirements before applicable deadlines may be costly.

Consider this example. The federal estate tax exemption is now significantly larger than many state estate tax exemptions. This can create an estate tax trap for married individuals. Your surviving spouse can avoid the trap, if your Will includes provisions that allow your spouse to make certain post-death decisions (tax elections and disclaimers) necessary to avoid the state estate tax. Such decisions often must be made within nine months after your death.

Imagine that your spouse died in 2011 and you are the Executor and a beneficiary of your spouse’s Will. The Will (like so many Wills signed by married individuals for the last several decades) provides that an amount equal to your spouse’s federal estate tax exemption (currently $5,000,000) will pass to a trust (call it the “Exemption Trust”) for your benefit. (Note: For an explanation of trusts, go to our recent post entitled “The Benefits of Trusts.” For a discussion of how the Exemption Trust can be part of a plan to reduce estate taxes, go to one of our older posts entitled “All Estate Plans with Marital Deduction Formula Documents Should be Reviewed.”)

This type of Will made a lot of sense many years ago when it was prepared (when the federal estate tax exemption was lower and the state estate tax exemption was the same as or larger than the federal exemption) but tax rules have changed. When the Will was drafted, perhaps the federal exemption was as low as $675,000. Also, the estate tax exemptions of the states were usually the same as the federal exemption. Now, Connecticut’s exemption is $3,500,000 and will probably be changed to $2,000,000 effective retroactively to January 1, 2011. New York’s exemption is $1,000,000. These state estate tax exemptions are substantially less than the current federal exemption ($5,000,000). Under these circumstances, your spouse’s Will may result in an unnecessary tax.

Assume that immediately before your spouse’s death your assets have a value of $500,000 and that your spouse’s estate has a value of $5,000,000. Without post mortem planning, if your spouse dies in 2011 with you surviving, the result would be as follows:

(1) The Exemption Trust would be $5,000,000, the total estate.

(2) You (the surviving spouse) would receive no portion of the estate because all the estate would go to the Exemption Trust. (Note: If you were to receive an inheritance from your spouse, it would be free of estate tax. Transfers from one spouse to a U.S. citizen spouse are not subject to any estate tax.)

(3) There would be no federal estate tax because the value of the property passing to non-spouse beneficiaries (the Exemption Trust) would not exceed the $5,000,000 federal exemption.

(4) There would be a Connecticut estate tax because the value of the property passing to non-spouse beneficiaries (the Exemption Trust) would exceed the Connecticut estate tax exemption. If the Connecticut exemption is $3,500,000, the Connecticut estate tax would be approximately $122,000. The Connecticut exemption will probably be changed, however, to $2,000,000 retroactive to January 1, 2011. In that case, the Connecticut estate tax would be approximately $238,000.

(5) Because your entire spouse’s estate would pass to the Exemption Trust, your estate would remain at $500,000 (the assets you owned immediately before your spouse’s death). At your subsequent death, your estate would be far less than any of the exemptions that might apply ($2,000,000 or $3,500,000 for Connecticut and $5,000,000 for the federal estate tax (scheduled to return to $1,000,000 in 2013). Accordingly, there would be no federal or state estate taxes at the time of your death in the future.

In hindsight, assuming that the federal exemption will not return to $1,000,000, it would have been better to limit the amount passing to the Exemption Trust to the value of the Connecticut exemption ($3,500,000). This would have eliminated the Connecticut estate tax. It would also mean that you (as surviving spouse) would receive $1,500,000 more from your spouse’s estate. As a result, your estate would be $2,000,000. If that is the value of your estate at your death, it would be less than the estate tax exemptions. Accordingly, there would be no estate tax (federal or Connecticut) at your death. All $5,500,000 which you and your spouse owned together would pass to your children without estate tax. The Connecticut estate tax would have been eliminated without any hardship or risk.

Your spouse’s Will cannot be changed after her death but, if her Will includes provisions which will allow your spouse’s survivors (you, the Executor and the Trustee) to make certain elections, allocations and other decisions, you may still achieve the desired tax goal.

For example, the Exemption Trust might be drafted to allow your spouse’s Executor to make an election (referred to as a “QTIP election”) to treat a portion of the Exemption Trust as a Marital Trust (which would be treated for tax purposes as if it passes to you as surviving spouse instead of to the Exemption Trust). As a result, the Exemption Trust portion would be reduced to $3,500,000 and the Connecticut estate tax would be avoided. The terms of the Will could then allow the Executor and the Trustee to split the Exemption Trust into two separate trusts (the Marital Trust and the Exemption Trust) which would be managed separately.

A different approach would involve disclaimers. A disclaimer is a rejection of (or refusal to accept) an inheritance. Your spouse’s Will might be drafted so that, if you disclaim your interests in a portion of the Exemption Trust, the disclaimed portion will pass to a Marital Trust thereby reducing the Exemption Trust. As a result, the Connecticut estate tax could be eliminated.

Post mortem planning can be challenging. In an environment where the tax rules frequently change, the course to take is not always clear. In the example above, we assumed that the federal exemption will not return to $1,000,000. If it were to return to $1,000,000, however, your decision might be different. You might decide that, to reduce your future federal estate tax (at rates starting at more than 40%), the QTIP election, or the disclaimer, should be made only to the extent doing so would not cause your estate, in the future at your death, to be larger than the federal estate tax exemption. Although taking such an approach now (at the time of your spouse’s death) would create a Connecticut estate tax, you might consider it a reasonable price to pay to avoid a future high federal estate tax. Using the facts from the example above, payment of a Connecticut estate tax ($122,000 to $238,000) from your spouse’s estate this year could achieve significant savings at the time of your death (from approximately $435,000 to $1,220,000 depending on the situation).

Theoretically, the savings to be achieved from maximizing the portion of your spouse’s estate that passes to the Exemption Trust without generating a federal estate tax (but at the cost of generating a Connecticut estate tax of from $122,000 to $238,000) can be from approximately $825,000 to approximately $1,650,000.

Your final decision regarding the post mortem planning options described above could also depend on other factors such as your age and health, plans to move to a different state, prospects that your estate will grow after your spouse’s death, prospects that the value of your estate will decrease after your spouse’s death, and the types of assets involved. For example, retirement accounts such as IRAs, 401(k) plans, and 403B plans which have not yet been subjected to income tax present additional challenges.

The number of tax elections and planning opportunities that might arise is equal to the number of diverse fact patterns our clients leave behind for their survivors to manage. The example above is one sample. The following is a list (not intended to be complete) of post mortem planning opportunities that come to mind as I write this post. In my experience, post mortem planning has most frequently related to:

(1) IRAs and other types of retirement accounts;

(2) Income taxation of estates and trusts, including elections relating to deductions for certain debts and expenses and use of a fiscal year instead of a calendar year;

(3) Elections to treat a revocable living trust as an estate for income tax purposes;

(4) Alternate valuation and valuation of special use assets;

(5) Deferral of estate tax payments;

(6) Charitable deductions for estate and income tax purposes;

(7) Elections to qualify certain trusts for the estate tax marital deduction;

(9) Allocation of the generation skipping tax exemption, and the division of trusts into subtrusts, to accomplish generation skipping tax goals;

(10) Tax effects of post death distributions from a business entity to a business owner’s estate, including corporate redemptions;

(11) Effects of a shareholder’s death on S corporation status and elections available to allow continued qualification;

(12) Disclaimers; and

(13) Court reformations of documents that do not satisfy technical requirements relating to marital and charitable deductions.

The above is a fairly long list but I have no doubt that the list of omissions would be quite a bit longer. The fact patterns we face will often suggest new opportunities for creative planning.

Posted on 4/4/2011 by Richard S. Land, Member,  Chipman, Mazzucco, Land & Pennarola, LLC.

 

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