Posted tagged ‘carryover basis’

Time is Running Out on Opportunity to Make Large Tax Free Gifts

June 7, 2012

 This post updates a post on the same topic dated February 9, 2011.

 Estate and Gift Tax Opportunity

As a result of legislation enacted by Congress in December 2010, the current estate and gift tax exemption was increased to $5,000,000 in 2011 and $5,120,000 in 2012.  The $5,120,000 exemption applies to the estates of those who die in, and to gifts made in, 2012.

In addition, the highest estate and gift tax bracket applicable in 2012 is a low (by estate tax historical standards) 35%.

In 2013, however, the old $1,000,000 estate and gift tax exemption is scheduled to return along with 55% as the highest estate and gift tax rate.

In light of such compelling tax facts, high net worth clients may be highly motivated to make large gifts before 2013.  If clients delay making such gifts until after 2012, and if Congress does not act to change the current law, the estate and gift tax exemption will revert to $1,000,000. The opportunity to transfer an additional $4,120,000 free of federal estate and gift tax will be lost.

The estate tax that may be saved as a result of making large gifts in 2012 can be significant. For example, assume that an unmarried client has an estate with a value of $10,000,000. If he makes no gift and if he dies in 2013 when the $1,000,000 exemption and higher tax rates apply, the U.S. estate tax would be approximately $3,727,000 and the state estate tax (we are using New York tax law for this article)  would be approximately $1,068,000 for a total estate tax obligation of approximately $4,795,000.

If the client believes he needs no more than $5,000,000 for himself, however, he might be inclined to make a gift of the rest ($5,000,000) to his children (or in trust for them). If the client were to make a gift of $5,000,000 in 2012 and die in 2013, there would be no U.S. gift tax to pay and the total estate tax would be $2,750,000 (federal, $2,359,000, and state, $391,600). The estate tax saved would be more than $2,000,000.

You can find details regarding how the gift and estate tax is calculated here: No Tax Clawback Pursuant to Section 304 of TRUIRJCA.

In Connecticut, the gift of $5,000,000 in 2012 would result in a gift tax of approximately $230,000. Although the $230,000  gift tax obligation would represent an upfront cost, the overall tax benefits would still be substantial and would not be materially different. Keep in mind that in Connecticut a gift tax is incurred only when cumulative taxable gifts exceed $2,000,000.

Generation Skipping Tax Opportunity

The generation skipping tax exemption has also been temporarily increased to $5,120,000. This means that, if your gift of $5,120,000 is to a generation skipping trust, you can allocate your $5,120,000 generation skipping tax exemption to the trust and, as a result, shelter the trust assets (including all appreciation) from estate, gift and generation skipping tax for many generations.

Other Advantages

Keep in mind that the opportunity to make larger gifts of income producing property free of gift, estate and generation skipping taxes includes the opportunity to shift income, which is generated by the assets you give away, to lower-income tax bracket taxpayers.

It is also an opportunity to protect assets from the claims of creditors, whether your own future creditors or the creditors of your beneficiaries.

If you are married, the gift could be to a trust which includes your spouse (as well as children, grandchildren and even younger generations) as a beneficiary. As a result, the income need not be totally lost to your household (at least as long as your spouse is living).

You can find more information about what a trust is, and common terms included in a trust, here: The Benefits of Trusts.

What Is the Down Side?

The motivation to make large gifts now is partially the result of an expectation that the old estate tax rules may return in 2013 with a $1,000,000 exemption and a 55% estate tax rate. What if Congress makes the current, more generous rules permanent so that, if death occurs in 2013 or later, the $5,000,000 (or $5,120,000) exemption will apply?

Assuming no significant appreciation in the value of the assets after the time the gift was made, there would be no estate tax cost or benefit associated with making the gift now instead of waiting to do so at the time of your death through the terms of your Will.

By making the gift now, however, your cost basis (for capital gain tax purposes) would be carried over to the donee of the gift. If the donee of the gift sells the donated asset, a capital gain tax could result based on the difference between the sale price and the carryover basis.

On the other hand, if you were to retain the assets until your death, the cost basis would be adjusted to the date of death value. As a result, the capital gain tax upon the subsequent sale of the assets by the beneficiaries who inherited the assets might be significantly reduced.

Accordingly, even though there would be little difference in the estate tax result, if a large gift is made, the opportunity to obtain a beneficial adjusted cost basis could be lost. Keep in mind, however, that careful tax planning can defer and minimize the capital gain tax to some extent. As a result, the capital gain tax risk is speculative and difficult to value.

The discussion above assumes that there is no increase in value after the gift is made. Keep in mind that, if the assets, which were the subject of the gift, increase in value, the increase would escape estate and gift taxation.

Fear of the “Tax Clawback”

Estate planners have expressed concern that, if death occurs in 2013 after a large gift has been made in 2011 or 2012, and after the U.S. estate tax exemption of $1,000,000 is reinstated, the estate tax would be calculated in a manner that, in effect, subjects the large gift made in 2011 or 2012 to an additional tax.  Commentators have referred to this as a “tax clawback.”  

The consensus among tax experts, who have looked at the issue closely, however, seems to be that the calculation which results in the tax clawback is incorrect.

Tax professionals who are reading this blog may want more details regarding the tax clawback issue. For details, go here:  No Tax Clawback Pursuant to Section 304 of TRUIRJCA.

What if there is a tax clawback? In the example above, if the Will includes a common type of tax clause, the estate, which consists of only $5,000,000 (what remains in the client’s estate after the gift is made), would bear a total estate tax burden of more than $4,135,000. If the beneficiaries under the Will are different from the donees of the gift, the beneficiaries under the Will would no doubt be extremely disappointed and would likely be looking for someone to blame for such an “unfair” result.

It is not difficult to imagine a situation where the estate tax due would actually exceed the value of the probate assets that would commonly bear the burden of the tax.

To recognize the issue is to reinforce how important it is to carefully allocate tax burdens among beneficiaries. Although we are confident that a proper interpretation of the most recent tax legislation removes the prospect of the tax clawback, until the IRS acknowledges that view, we cannot be certain that the IRS will agree.  As always, it is best to take great care in allocating tax burdens by properly crafting tax clauses in your Wills and other estate planning documents. 

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

 

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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.

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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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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.

 

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.

Two Year Tax Planning Window of Opportunity for Large Gifts

February 9, 2011

Estate and Gift Tax Opportunity

As a result of legislation enacted by Congress in December, the current (but temporary) estate and gift tax exemption is increased to $5,000,000. The $5,000,000 exemption applies to the estates of those who die in, and to gifts made in, 2011 and 2012.

In addition, the highest estate and gift tax bracket applicable in 2011 and 2012 has been reduced to 35%.

In 2013, however, the old $1,000,000 estate and gift tax exemption is scheduled to return along with 55% as the highest estate and gift tax rate.

In light of such compelling tax facts, high net worth clients may be highly motivated to make large gifts before 2013.  If clients delay making such gifts until after 2012, and if Congress does not act to change the current law, the estate and gift tax exemption will revert to $1,000,000. The opportunity to transfer an additional $4,000,000 free of estate and gift tax will be lost.

The estate tax that may be saved as a result of making large gifts in 2011 and 2012 can be significant. For example, assume that an unmarried client has an estate with a value of $10,000,000. If he makes no gift and if he dies in 2013 when the $1,000,000 exemption and higher tax rates apply, the U.S. estate tax would be approximately $3,727,000 and the state estate tax (we are using New York tax law for this article)  would be approximately $1,068,000 for a total estate tax obligation of approximately $4,795,000.

If the client believes he needs no more than $5,000,000 for himself, however, he might be inclined to make a gift of the rest ($5,000,000) to his children (or in trust for them). If the client were to make a gift of $5,000,000 in 2012 and die in 2013, there would be no U.S. gift tax to pay and the total estate tax would be $2,750,000 (federal, $2,359,000, and state, $391,600). The estate tax saved would be more than $2,000,000.

You can find details regarding how the gift and estate tax is calculated here: No Tax Clawback Pursuant to Section 304 of TRUIRJCA.

In Connecticut, the gift of $5,000,000 in 2012 would result in a gift tax of approximately $122,000. Although the $122,000 gift tax obligation would represent an upfront cost, the overall tax benefits would still be substantial and would not be materially different. Keep in mind that in Connecticut a gift tax is incurred only when cumulative taxable gifts exceed $3,500,000.

Generation Skipping Tax Opportunity

The generation skipping tax exemption has also been temporarily increased to $5,000,000. This means that, if your gift of $5,000,000 is to a generation skipping trust, you can allocate your $5,000,000 generation skipping tax exemption to the trust and, as a result, shelter the trust assets (including all appreciation) from estate, gift and generation skipping tax for many generations.

Other Advantages

Keep in mind that the opportunity to make larger gifts of income producing property free of gift, estate and generation skipping taxes includes the opportunity to shift income, which is generated by the assets you give away, to lower-income tax bracket taxpayers.

It is also an opportunity to protect assets from the claims of creditors, whether your own future creditors or the creditors of your beneficiaries.

If you are married, the gift could be to a trust which includes your spouse (as well as children, grandchildren and even younger generations) as a beneficiary. As a result, the income need not be totally lost to your household (at least as long as your spouse is living).

You can find more information about what a trust is, and common terms included in a trust, here: The Benefits of Trusts.

What Is the Down Side?

The motivation to make large gifts now is partially the result of an expectation that the old estate tax rules may return in 2013 with a $1,000,000 exemption and a 55% estate tax rate. What if Congress makes the current, more generous rules permanent so that, if death occurs in 2013 or later, the $5,000,000 exemption will apply?

Assuming no significant appreciation in the value of the assets after the time the gift was made, there would be no estate tax cost or benefit associated with making the gift now instead of waiting to do so at the time of your death through the terms of your Will.

By making the gift now, however, your cost basis (for capital gain tax purposes) would be carried over to the donee of the gift. If the donee of the gift sells the donated asset, a capital gain tax could result based on the difference between the sale price and the carryover basis.

On the other hand, if you were to retain the assets until your death, the cost basis would be adjusted to the date of death value. As a result, the capital gain tax upon the subsequent sale of the assets by the beneficiaries who inherited the assets might be significantly reduced.

Accordingly, even though there would be little difference in the estate tax result, if a large gift is made, the opportunity to obtain a beneficial adjusted cost basis could be lost. Keep in mind, however, that careful tax planning can defer and minimize the capital gain tax to some extent. As a result, the capital gain tax risk is speculative and difficult to value.

The discussion above assumes that there is no increase in value after the gift is made. Keep in mind that, if the assets, which were the subject of the gift, increase in value, the increase would escape estate and gift taxation.

Fear of the “Tax Clawback”

Estate planners have expressed concern that, if death occurs in 2013 after a large gift has been made in 2011 or 2012, and after the U.S. estate tax exemption of $1,000,000 is reinstated, the estate tax would be calculated in a manner that, in effect, subjects the large gift made in 2011 or 2012 to an additional tax.  Commentators have referred to this as a “tax clawback.”  

The consensus among tax experts, who have looked at the issue closely, however, seems to be that the calculation which results in the tax clawback is incorrect.

Tax professionals who are reading this blog may want more details regarding the tax clawback issue. For details, go here:  No Tax Clawback Pursuant to Section 304 of TRUIRJCA.

What if there is a tax clawback? In the example above, if the Will includes a common type of tax clause, the estate, which consists of only $5,000,000 (what remains in the client’s estate after the gift is made), would bear a total estate tax burden of more than $4,135,000. If the beneficiaries under the Will are different from the donees of the gift, the beneficiaries under the Will would no doubt be extremely disappointed and would likely be looking for someone to blame for such an “unfair” result.

It is not difficult to imagine a situation where the estate tax due would actually exceed the value of the probate assets that would commonly bear the burden of the tax.

To recognize the issue is to reinforce how important it is to carefully allocate tax burdens among beneficiaries. Although we are confident that a proper interpretation of the most recent tax legislation removes the prospect of the tax clawback, until the IRS acknowledges that view, we cannot be certain that the IRS will agree.  As always, it is best to take great care in allocating tax burdens by properly crafting tax clauses in your Wills and other estate planning documents. 

Posted on 2/9/2011 by Richard S. Land, Member, and Kasey 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.

The Future of Estate Planning

July 16, 2010

Half of 2010 is behind us and January 1, 2011, is around the corner. Although several proposals for estate tax exemptions from $1,000,000 to $5,000,000, and estate tax brackets from 35% to 55%, are in the Congressional pipeline, a Congressional stalemate seems just as likely as action. As a result, the unthinkable and unexpected now seem to be possible – the return of a federal estate tax system with a low $1,000,000 estate tax “exemption” and estate tax brackets that kick in at 41%. Whatever becomes the new estate planning reality, we expect there will be renewed interest in the following estate planning techniques.

(1) Credit Shelter Trusts (a/k/a “B Trusts,” “Family Trusts,” and “Bypass Trusts”). Many more clients will regard credit shelter trusts, which are established when one spouse dies for the benefit of the surviving spouse, as a real necessity instead of just possibly advantageous. For background details, see our article entitled “All Estate Plans with Marital Deduction Formula Documents Should Be Reviewed.”

(2) Gift Planning. If the “exemption” returns to $1,000,000, an estate that exceeds the “exemption,” after taking into account marital, charitable and other deductions, will be taxed at no less than 41%. Clients will be looking for gift techniques to reduce the tax exposure by reducing their estates. Simple gift techniques include small gifts ($13,000 per year per donee) which are excluded from taxable gifts and gifts to certain qualified education accounts. More complicated gift techniques include irrevocable life insurance trusts, qualified personal residence trusts, grantor retained annuity trusts, sales to certain irrevocable grantor trusts, and charitable trusts. In addition, in a high estate tax environment, many clients may wish to take advantage of depressed real estate values to make gifts of interests in real estate. Related gift planning will make the use of family limited liability companies and partnerships even more popular. The use of grantor retained annuity trusts (especially when interest rates are so low) and sales to specially designed trusts (the “intentionally defective grantor trust” or “IDGT”) will be more attractive even if proposals to limit valuation discounts are adopted.

(3) Life Insurance. Life insurance has always been a popular way to make certain that cash is available to pay estate taxes. The need for life insurance is especially compelling when large illiquid estates (for example, consisting of primarily real property, retirement plan accounts, such as IRAs and 401(k) plans, and closely held business interests) have substantial estate tax obligations. If the estate tax “exemption” is reduced and if estate tax brackets are increased, more clients will choose to acquire life insurance owned by an irrevocable life insurance trust and financed by gifts to the trust. Because estate tax obligations of U.S. citizen married couples can be deferred until the death of the surviving spouse, we expect that more married couples will be acquiring joint life (or “second to die”) life insurance policies (owned by an irrevocable trust) to finance estate tax obligations which will be due when the surviving spouse dies. Life insurance, and irrevocable life insurance trusts, can also be a useful way to deal with the mortality risk associated with grantor retained annuity trusts and similar trusts designed for gifts of a residence (the qualified personal residence trust).

There has always been a natural tendency to postpone estate planning especially when youth and good health make the risks seem remote. The uncertainty of the last ten years relating to estate tax repeal added an additional rationale for postponing the estate planning exercise. Although many of us are in denial and feel that we have preserved our youthful vigor and good health over the last ten years, the coming of January 1, 2011, and a new estate planning reality, cannot be denied.

In addition, as Congress continues to pile on new debt that will encumber the future efforts of our children and grandchildren, we face another new reality: that, for the first time in our country’s history, the next generation’s quality of life will not be better than our own. The planning steps mentioned above may minimize the estate tax burdens and maximize what is left for our children and grandchildren at a time when they may need it like no other generation before us.

Let us know what you think. Feel free to leave a comment.

Posted by Richard S. Land (rsl@danburylaw.com)

Announcement Seminar Rescheduled; March 18, 2010; 7:00 to 9:00 PM; Ethan Allen Inn, Danbury, Connecticut

February 22, 2010

Is It Time To Review Your Estate Plan?

Federal Estate Tax Repeal:  As of January 1, 2010 the U.S. estate tax has been repealed, temporarily.  The U.S. estate tax is scheduled to return in 2011 with a $1,000,000 “exemption.”  The 2009 exemption was $3,500,000.  We expect that Congress will take some action in the coming months.

Connecticut Estate Tax Changes:  Effective January 1, 2010, the Connecticut estate tax “exemption” was increased from $2,000,000 to $3,500,000 but the fate of this change is uncertain.

Our March seminar will help you determine whether you should review your estate plan to take into account the tax changes that have already been made and the changes that will be coming.  Some of the effects of repeal of the federal estate tax are explained here: January 10, 2010, article on repeal and the need for a review.

Other Reasons to Review: The other reasons for review continue to apply.

Have the circumstances of your Executor, Trustee or Guardian changed significantly?

Has the life of a beneficiary changed significantly? If a beneficiary becomes disabled, dies or is divorcing, perhaps you should change the estate plan as it relates to that beneficiary. A beneficiary’s good fortune may also be a good reason to make changes.

Have your assets changed significantly? If your assets have grown, you may now need tax planning. If your estate has decreased in size, the tax planning you did many years ago may no longer be appropriate.

If your health is failing, or if that possibility is now more real to you, you may wish to consider different approaches for dealing with incapacity.

If a substantial part of your estate consists of IRAs and similar retirement accounts (including life insurance), it may be time for you to consider specific planning strategies for such accounts.  Conversion to Roth IRAs in 2010 is especially appealing.

If you have pets, you may wish to consider recently enacted legislation relating to “pet trusts.”

We will cover the most common approaches for dealing with these issues and more.

LET US KNOW WHAT TOPICS YOU WANT US TO COVER

Contact us to let us know whether you would like us to cover a particular issue.  If we can, we will try to fit the issue into this program or a program we plan for the future.  The best way to reach us is by e-mail, but we would be pleased to receive your suggestions by regular mail or by telephone.  If you wish, call after hours and leave a voice mail message. Telephone Number: (203) 744-1929.  Or, contact me by email at rsl@danburylaw.com or Lynn D’Ostilio at lsd@danburylaw.com.

SEMINAR LOCATION AND TIME

The seminar will be on March 18, 2010, at the Ethan Allen Inn, 21 Lake Avenue Extension, Danbury, Connecticut from 7:00 p.m. to 9:00 p.m.  These seminars are always well attended and space is limited.  If you wish to attend, or if others you know are interested in attending, to reserve space call us or send us an e-mail message ( rsl@danburylaw.com or  lsd@danburylaw.com) containing your name, number attending, telephone number and e-mail address.

Posted on 2/22/2010 by Richard S. Land, Member, Chipman, Mazzucco, Land & Pennarola, LLC.

All Estate Plans with Marital Deduction Formula Documents Should be Reviewed

January 10, 2010

Making Use of Estate Tax Marital Deductions and Estate Tax Exemptions in 2010

As mentioned here, for the first time since 1915, until Congress acts to re-impose an estate tax, there will be no estate tax on estates of those who die in 2010. One of the problems created by Congress’s failure to deal effectively with this unique situation relates to the estate tax marital deduction. The purpose of this article is to alert you to problems that may exist with certain types of wills (and will substitutes such as revocable living trusts) that incorporate marital deduction planning.

Rules Applicable and Techniques Employed Before 2010

Except for the estate of a person who dies in 2010, married couples have estate planning options available to them that are not available to unmarried couples.

Under the pre-2010 federal estate tax rules (and Connecticut and New York estate tax rules), in computing the applicable estate tax, a deceased spouse’s estate is entitled to an unlimited marital deduction for certain property passing to or for the benefit of the surviving spouse if the surviving spouse is a U.S. citizen. In addition, the estate is entitled to a credit (the “unified credit”) against any federal estate tax due with respect to property not qualifying for any deduction.

In 2009, the unified credit was $1,455,800 and it sheltered $3,500,000 from the federal estate tax. In this article we use the term “exemption” as the amount that is sheltered from the estate tax as a result of the unified credit.

As this memo is being written on January 9, 2010, there is no federal estate tax. No one I know (or who I have read) believes this will be the case for long. Congress is expected to take some action early in 2010. Until Congress takes action (probably retroactively), however, for the estates of decedents who die in 2010 there is no federal estate tax. You can think of that as creating a temporary unlimited estate tax “exemption.”

In 2011 the federal estate tax is scheduled to return with a $345,800 unified credit which shelters $1,000,000 from the federal estate tax. Accordingly, under current federal estate tax law, the “exemption” is scheduled to be $1,000,000 in 2011 with tax brackets jumping back up to pre-2000 levels.

At the core of most planning for well-to-do married couples is the principle that a transfer from one spouse to a U.S. citizen spouse occurs free of any estate and gift tax. Such gifts, however, increase the estate of the donee (or surviving) spouse. As a result, if the survivor’s estate is then larger than the federal estate tax exemption, the assets given to the surviving spouse are exposed to estate taxation later at the time of the surviving spouse’s death.

At the state level, before and after 2010, the same principle applies except for the fact that state estate tax exemptions are frequently different from the federal estate tax exemption. Currently the Connecticut estate tax exemption is $3,500,000 and New York’s exemption is $1,000,000.

To make matters more complicated, as the federal tax provisions have been changed, state legislatures have responded with frequent changes to their estate tax laws. For example, Connecticut has changed its estate and gift tax provisions in significant ways more than six different times in the last five years. Within the last five years, the Connecticut General Assembly has repealed its succession tax, enacted an enhanced type of estate tax, repealed that estate tax, hastily adopted a unique new estate tax (containing obvious errors which it has chosen to perpetuate), adopted a new estate tax with a $3,500,000 exemption, and postponed the application of the $3,500,000 exemption while reinstating the $2,000,000 exemption. Governor Rell has vetoed the postponement and reinstatement. We are waiting to see whether the Connecticut lawmakers will override the Governor’s veto.  As matters currently stand (January 9, 2010), the Connecticut estate tax exemption is $3,500,000.

Although it is difficult to predict the actual amount of the federal and state estate tax exemptions that may apply at the time of your death, if an estate tax is then applicable at either a state or federal level, we can assume that an estate tax exemption in some amount will exist. If the surviving spouse receives all the property of the deceased spouse, the survivor’s estate tax could exceed the then existing exemption, thereby generating an estate tax obligation to pay.

The estate tax could be eliminated or reduced if the deceased spouse’s estate plan takes advantage of the marital deduction only to the extent necessary to minimize or eliminate the tax payable from his or her estate. This would mean that, before 2010 (and again in 2011) an amount roughly equal to the applicable exemption would pass to a trust for the benefit of the survivor (frequently called a “credit shelter trust,” “bypass trust” or “exemption trust;” for the purposes of this article, we will call it an “exemption trust”). The exemption trust would not be subjected to an estate tax when the survivor dies.

With the above in mind, estate planners often begin their analyses by asking: “Why give the surviving spouse any more as a marital deduction gift (which will be subject to tax on his or her subsequent death) than is necessary to reduce the deceased spouse’s estate tax to the lowest amount (usually zero), when the property not so given to the surviving spouse (for example, having the value of the exemption) can be placed in a trust (the exemption trust) for the benefit of the surviving spouse and escape tax entirely on his or her subsequent death?”

An Illustration: Consider the following example. Mr. Taxpayer has an estate of $1,800,000. His primary goal is the care and comfort of Mrs. Taxpayer. His secondary goal is the preservation of his estate for ultimate distribution to his descendants. Some reasonable alternatives for the disposition of his estate are:

(a) Give his total estate to Mrs. Taxpayer.

(b) Give his total estate to Mrs. Taxpayer but give her the opportunity to “disclaim” a portion of the estate. The “disclaimed property” would pass to a trust for Mrs. Taxpayer’s benefit (the “Disclaimer Trust”) and would not be subject to tax on Mrs. Taxpayer’s subsequent death. This alternative will be referred to as the “Disclaimer Plan.” [Note: A “disclaimer” is the irrevocable refusal to accept a gift of property. The general rule is that for a disclaimer to be effective for tax purposes the disclaiming party cannot have any interest in the disclaimed property following the disclaimer. There is, however, a special exception which allows a surviving spouse to disclaim property passing into a trust created under the deceased spouse’s Will for the benefit of the surviving spouse. Such a trust must, however, be narrowly drawn because the surviving spouse may not have any powers over trust principal.]

(c) Give part of his estate to Mrs. Taxpayer and the rest (equal to the exemption existing at the time of his death) to a trust (the “Exemption Trust”) for Mrs. Taxpayer’s benefit. The Exemption Trust would not be subjected to estate tax on Mrs. Taxpayer’s subsequent death. This alternative will be referred to as the “Formula Plan.”

Alternative (b), the Disclaimer Plan, is actually the same as alternative (a) but with the added flexibility which arises by giving to Mrs. Taxpayer the power to make the planning decisions, with the help of her advisors, after Mr. Taxpayer’s death. Alternative (b), the Disclaimer Plan, could produce tax results almost the equivalent of alternative (c), the Formula Plan. One important difference between the Disclaimer Plan and Formula Plan is that, under the Disclaimer Plan, tax savings will result only if the surviving spouse takes the necessary steps. The following discussion will relate only to the Disclaimer Plan and the Formula Plan.

The Disclaimer Plan: Suppose (i) Mr. Taxpayer dies in 2011 (when the federal exemption is $1,000,000) with an estate of $1,800,000, (ii) that when he drafted his Will he adopted alternative (b), the Disclaimer Plan, and (iii) that Mrs. Taxpayer’s separate assets have no value. Mr. Taxpayer’s Will provides that his total estate passes to Mrs. Taxpayer except for property she disclaims. If Mrs. Taxpayer did not disclaim, she would receive $1,800,000 (less some administration expenses) from Mr. Taxpayer’s estate, all of which would be subject to tax on her subsequent death. Because Mrs. Taxpayer’s estate, when she subsequently dies, would be approximately $1,800,000, and larger than the applicable federal estate tax exemption ($1,000,000), estate taxes would be payable from her estate. The tax would be significant. In 2011, once the taxable estate exceeds the exemption, the lowest applicable estate tax bracket would be 41%.

Mrs. Taxpayer’s estate tax liability could be significantly reduced by her use of the disclaimer shortly after Mr. Taxpayer’s death. Suppose, for example, that Mrs. Taxpayer decides that she does not need the total $1,800,000 outright from Mr. Taxpayer in order to be financially secure, or that, regardless of her financial security, the ultimate tax costs of outright ownership of the total $1,800,000 is too high. She might decide to disclaim a portion of Mr. Taxpayer’s estate having a value up to $1,000,000 (the exemption), which amount, according to Mr. Taxpayer’s Will, would pass into the Disclaimer Trust for her benefit. She might wish to pick $1,000,000 as the appropriate amount to disclaim because $1,000,000 (the 2011 federal estate tax exemption) would be the largest amount she could disclaim without generating a U.S. estate tax. The results of such a disclaimer would be as follows:

(a) Mrs. Taxpayer would receive outright from Mr. Taxpayer approximately $800,000. Her estate at the time of her subsequent death would consist of her own property (which we earlier assumed had no value) plus the $800,000 received from Mr. Taxpayer.

(b) The Disclaimer Trust receiving the disclaimed property would contain $1,000,000, less some other items (administration expenses). The Trustee would pay all income to Mrs. Taxpayer and also would have broad discretion to pay principal to Mrs. Taxpayer if she needed it. If desirable, the Trustee could be allowed to invade income and principal for the benefit of others although such provisions could make the disclaimer less attractive to Mrs. Taxpayer. The assets in the trust would not be taxed as part of Mrs. Taxpayer’s estate when she subsequently dies.

(c) Upon Mrs. Taxpayer’s subsequent death, U.S. estate taxes saved as a result of Mrs. Taxpayer’s disclaimer would probably exceed $250,000.

(d) State death taxes might also be saved by this plan because the assets in the trust (the disclaimed property) would not be subject to such taxes on Mrs. Taxpayer’s subsequent death.

The Formula Plan: Under the Formula Plan, the tax planning decisions are made in advance (at the time Mr. Taxpayer signs his Will) for Mrs. Taxpayer in favor of overall estate tax savings. The Formula Plan would be designed to bequeath to the Exemption Trust for the benefit of the whole Taxpayer family an amount equal to the estate tax exemption available at the time of Mr. Taxpayer’s death. The remainder of Mr. Taxpayer’s estate assets would pass either outright to Mrs. Taxpayer or in a trust which would qualify for the marital deduction (the “Marital Trust” or the QTIP Trust” referred to below). Although this may seem to achieve the same results as can be obtained by using the Disclaimer Plan, the most important advantage which the Exemption Trust has over the Disclaimer Trust is that the Exemption Trust can contain broad discretionary powers over principal which are exercisable by Mrs. Taxpayer, but the Disclaimer Trust cannot contain such powers.

In order to decide whether to adopt the Disclaimer Plan or the Formula Plan, Mr. Taxpayer would consider the following:

(1) Whether he believes the Formula Plan would provide his wife with sufficient benefits to make her feel comfortable and secure. One way to ask the question is: “Do I believe that, even though my wife may have control over less property, there should be placed in a trust for her benefit in all events the full amount of the exemption, knowing that to do so will lower death taxes at my wife’s subsequent death?” Of course, Mr. Taxpayer must at this point decide how he feels about trusts in light of the substantial tax savings which could result from the use of one or more trusts. If the answer to the question is “yes,” the Formula Plan is probably the one to adopt.

(2) The answer to the question posed above may depend upon the nature of the trust, and Mr. Taxpayer must decide whether the following powers, which are frequently included in the Exemption Trust under the Formula Plan (but are excluded from the Disclaimer Trust, except for the $5,000 or 5% withdrawal power), make the difference. These powers are: (i) Mrs. Taxpayer’s power during her lifetime to appoint trust principal to individuals other than herself (usually limited to descendants); (ii) Mrs. Taxpayer’s power to withdraw for her own use the greater of $5,000 or 5% of the trust principal each year, and (iii) Mrs. Taxpayer’s power upon her death to appoint trust principal to individuals (usually limited to descendants), other than herself or her estate, by appropriate provisions in her Will. On the other hand, both the Exemption Trust and the Disclaimer Trust would provide that income be paid to Mrs. Taxpayer and that the Trustee has broad discretionary powers to invade principal for Mrs. Taxpayer. As previously mentioned, the Disclaimer Trust could also include a right in Mrs. Taxpayer to withdraw the greater of $5,000 or 5% of the Disclaimer Trust principal.

(3) Mr. Taxpayer should also consider the fact that, if the Disclaimer Plan is adopted, the tax planning decisions will be left to Mrs. Taxpayer (with the help of her advisors) and must be made within nine months after his death under what could be stressful circumstances. If he believes his wife is capable of making the decision as to how much should be placed in trust so as to reduce taxes at her later death, even under such stressful circumstances, then the Disclaimer Plan would have greater appeal, even though the Disclaimer Trust is a less flexible trust. If Mr. Taxpayer believes that it would be unwise to leave this decision to Mrs. Taxpayer at a difficult time, or that the Disclaimer Trust is too inflexible, then the Formula Plan would have greater appeal.

Marital Trust Options: Both the Disclaimer Plan and the Formula Plan take advantage of the marital deduction. The different ways in which property may pass and qualify for the marital deduction can be used in either plan. If the surviving spouse is a U.S. citizen, the forms of marital deduction gifts are (i) the outright gift, (ii) the traditional Marital Trust which gives the surviving spouse the absolute power to control by Will the disposition of trust principal upon the surviving spouse’s death, and (iii) the qualified terminable interest property trust (“QTIP Trust”). Unlike the traditional Marital Trust, the QTIP Trust may irrevocably designate descendants (or any other person or class of persons) as the ultimate recipients of the marital deduction property (or prohibit the surviving spouse from appointing such property to persons other than a particular class of people). If the surviving spouse is not a U.S. citizen, the marital deduction will not be available except for property which passes to a trust known as a qualified domestic trust (“QDOT Trust”).

Considerations Relating to the Use of Trusts: The planning techniques discussed above require the creation of trusts. Factors to consider regarding the use of trusts are:

(1) Trust assets are managed by a Trustee (a person or bank) for the benefit of others. The beneficiaries, therefore, do not have control over the trust assets. A Trustee, however, must account to the beneficiaries for its actions. It is generally preferable to give a Trustee broad discretion (limited, however, by prudence) regarding investment decisions. Often, depending on circumstances, a Trustee may also be given broad discretion to decide how benefits will be divided among members of a class of beneficiaries.

(2) The most important decision regarding the use of a trust is the identity of the Trustee. The Trustee must, among other things, be meticulous about keeping separate and complete records, prudent with respect to investments, sensitive to the needs of the beneficiaries and fair in its dealings with both the trust and all beneficiaries.

(3) The management of trusts involves some expense relating to the Trustee’s compensation, court costs and legal fees.

(4) Trusts are not merely tax-saving devices. A trust may be the best way to provide a benefit for someone who is not up to managing assets. Particularly when tax considerations are not of primary concern, a trust can be drafted containing an endless variety of provisions to accomplish many different goals.

The Effects of Repeal in 2010 (Current Law as of January 9, 2010)

Federal Exemption Uncertainty: Many of you have estate planning documents which contain provisions referring to the federal estate tax exemption (the Formula Plan described above). If your death occurs in 2010 when the federal estate tax does not apply, there may be questions regarding how the documents will be interpreted. For example, documents which our firm prepared using the Formula Plan will be interpreted to maximize the value of the Exemption Trust with the result that the Marital Share might be reduced or eliminated. Such a result is not necessarily bad depending on how assets are titled and beneficiary designations for retirement accounts, life insurance and other similar assets are prepared.  To avoid surprises, however, and to assure proper coordination between the terms of the Will (or Will substitute) and beneficiary designations, it is important for you to review such plans. 

Different attorneys take different approaches to the preparation of Formula Plans. How each provision will be interpreted in light of the federal estate tax law changes will depend on the language employed by the drafting attorney. Some drafting approaches may be interpreted as maximizing the Marital Share with the result that the exemption trust would not be funded. In that case, an opportunity to use the exemption trust to shelter assets from an estate tax (that might be imposed when the surviving spouse dies) would be lost.

We suggest that everyone who has estate planning documents that use the Formula Plan ask their attorneys to review their documents and the assets comprising their estates.

State Exemption Uncertainty: As mentioned above, Connecticut’s General Assembly enacted a $3,500,000 exemption which is effective on January 1, 2010, but then postponed its effective date for two years. The postponement was vetoed, however, by Governor Rell. Unless the General Assembly overrides the veto, Connecticut will have a $3,500,000 exemption.

Other states have smaller exemptions. New York and Massachusetts, for example, have $1,000,000 exemptions. New Jersey and Rhode Island have $675,000 exemptions.

Estate plans that use the type of Formula Plan that maximizes the size of the exemption trust could result in an unexpectedly high state estate tax when the value of the property passing to the exemption trust (in 2010 this could be 100% of the estate) exceeds the value of the state exemption.

We suggest that everyone who has estate planning documents that use the Formula Plan ask their attorneys to review their documents, and the assets comprising their estates, to determine whether the size of the exemption trust should be limited to the state exemption.

Marital Deduction Uncertainty: As mentioned above, if the surviving spouse is a U.S. citizen, the forms of marital deduction gifts are (i) the outright gift, (ii) the traditional Marital Trust which gives the surviving spouse the absolute power to control by Will the disposition of trust principal upon the surviving spouse’s death, and (iii) the qualified terminable interest property trust (“QTIP Trust”). If the surviving spouse is not a U.S. citizen, the marital deduction will not be available except for property which passes to a trust known as a qualified domestic trust (“QDOT Trust”).

Many of you have estate planning documents which include a QTIP trust or a QDOT trust that is drafted like a QTIP trust. Property passing to such a trust qualifies for the estate tax marital deduction only if an election is made. In 2010, when the federal estate tax is not applicable, there is no way to make the federal QTIP and QDOT elections. Connecticut law allows a QTIP election (but is silent on the QDOT election) even when there is no federal estate tax in effect (referred to as a “state-only election”). Other states may not allow a state-only election. For example, New York, New Jersey and Vermont (among other states) do not allow a QTIP election when no federal election is made.

Accordingly, if your death occurs in 2010 when the federal estate tax does not apply, and you own property in a state which does not allow a “state-only” QTIP election (similar to New York), and if that property passes to a QTIP type trust, no estate tax marital deduction will be available under that state’s estate tax law.  As a result, estate taxes imposed by that state may by unexpectedly high.

In addition, it appears that, during 2010 (when no federal estate tax applies), no Connecticut estate tax marital deduction will be allowed for any type of transfer at death to a spouse who is not a U.S. citizen because there is no provision for making a QDOT election at the state level.  As a result, a surviving non-citizen spouse may be surprised by unexpectedly high state estate taxes.

Income Tax Basis and Capital Gains Tax Uncertainty: You might expect that the absence of the U.S. estate tax would make life simpler. Look a little under the surface, however, and you begin to understand that absence of the U.S. estate tax leaves behind certain provisions relating to capital gain taxes which will adversely affect everyone who has assets (and I literally mean everyone) while the estate tax, before repeal, adversely affected only a very small group.

Before capital gains can be taxed, the size of the gain must be computed. Generally, the gain is the difference between what you receive in exchange for the asset and your tax basis in the asset. When you purchase an asset, your tax basis in the asset is generally what you pay for it. Before 2010, when you inherited an asset from a decedent, your tax basis in the asset was adjusted to its value as of the date of the decedent’s death. Accordingly, inherited property (there are exceptions, however) usually could be sold shortly after the decedent’s death free of capital gains tax. In 2010, however, that changes. When you inherit property from someone who dies in 2010, there will not be the automatic adjustment to basis; rather, you will receive the same basis the decedent had in the property immediately before the decedent’s death (referred to as a “carry over basis”) subject to certain valuable (but limited) adjustments that must be made by your Executor.

For every decedent’s estate (whether married or single), 2010 law provides that the tax basis of inherited property may be increased to its date of death value, but the increase is limited to a total adjustment of $1,300,000. We do not yet know the mechanics of making such adjustments. Nevertheless, we expect that a very large proportion of decedent’s estates will be affected by this provision (a much larger proportion than those who are affected by the federal estate tax). Many (a vast majority?) who would not have had to file any federal estate tax return now will be required to file tax forms with the IRS to make the adjustment.

For an estate of a married decedent, an additional $3,000,000 adjustment to tax basis may be available for certain property that passes to a surviving spouse or to a qualifying trust for the benefit of the surviving spouse. Very few current estate planning documents take this $3,000,000 adjustment into account. Many exemption trusts will not qualify for this adjustment. Accordingly, unless the terms of the exemption trust are modified, an opportunity to take advantage of the $3,000,000 adjustment may be lost.

Conclusion

All estate plans with marital deduction formula documents should be reviewed. The review should include a review of all assets and beneficiary designations.

Posted on 12/30/2009 by Richard S. Land, Member, Chipman, Mazzucco, Land & Pennarola, LLC.

January, 2010, Copyright Richard S. Land

Note:  To comply with U.S. Treasury Department rules and regulations, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) 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.


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