Posted tagged ‘marital trust’

New Risks of Unnecessary State Estate Taxes

January 13, 2013

The American Taxpayer Relief Act (effective 1/1/2013) created an opportunity for many to simplify their estate plans. In our companion article on this blog, Simplify Your Estate Plan Maybe, we encouraged you to consider simplification. Without simplification, many married couples risk the imposition of an unnecessary state estate tax (the focus of this post).

In Simplify Your Estate Plan Maybe, we also encouraged you to take a look at Clearwater, Florida, Attorney Alan Gassmann’s excellent summary here: Summary of the American Taxpayer Relief Act of 2012.

It sounds strange and counterintuitive, after so many decades of convincing clients that complex trust arrangements were necessary to save federal estate taxes, but it is true: by adopting a simple estate plan (and revoking the old complex one), a Connecticut married couple can save as much as $250,000 and a New York married couple can save as much $400,000.

Connecticut Residents: Many estate plans are based on documents that provide that, when one spouse passes away, an amount equal to as much as the federal estate tax exemption (as of 1/1/2013 this is $5,250,000) will pass to a trust for the benefit of the surviving spouse. If the amount passing to the trust exceeds the Connecticut estate tax exemption of $2,000,000, a Connecticut estate tax will be imposed. If the full amount of the federal exemption passes to the trust, the Connecticut estate tax would be approximately $250,000. The Connecticut estate tax would be avoided if all the $5,250,000 were to pass to the surviving spouse or if the amount passing to the trust were limited to $2,000,000 (the Connecticut estate tax exemption).

New York Residents: The New York estate tax exemption is $1,000,000. If an amount equal to the federal estate tax exemption ($5,250,000) were to pass to the trust, the New York estate tax would be approximately $400,000. The New York estate tax would be avoided if all the $5,250,000 were to pass to the surviving spouse or if the amount passing to the trust were limited to $1,000,000 (the New York estate tax exemption).

In the past, estate planners worried that, if the surviving spouse were to receive 100% of the assets, the surviving spouse’s estate would be large and exposed to the federal estate tax at the surviving spouse’s death. The rules have changed, however, to enhance the surviving spouse’s federal estate tax exemption. Not only would the surviving spouse have his or her own $5,250,000 federal estate tax exemption, the surviving spouse would also receive the unused portion of the deceased spouse’s exemption (in this case $5,250,000). As a result, the surviving spouse would have a total federal estate tax exemption of $10,500,000, more than enough to shield all but the wealthiest from the federal estate tax.

Keep in mind, however, that the state estate tax could still apply at the surviving spouse’s death. As a result, clients might still want to engage in planning to reduce state estate taxes. Such planning would resemble the planning which, in the past, revolved around the federal estate tax exemption. In addition, the surviving spouse may simply decide to move to a state that has no estate tax.

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.

Video of July Basic Estate Planning Seminar Posted to YouTube

October 8, 2012

The video of our July Basic Estate Planning Seminar has been posted to YouTube.  You can access it below.

The question and answer sections were the focus of this seminar.

Richard S. Land, attorney and member of Chipman Mazzucco, made  the presentation in five parts, each part building on the preceding one and followed by a question and answer session.

Part One (and the Part One Q&A): Will basics; consequences of not having a Will, the difference between probate property and nonprobate property; trusts; guardians; and executors.

Part Two (and the Part Two Q&A): federal and Connecticut estate taxes and estate tax “exemptions”; the “portable” estate tax “exemption”; “exemption” increases and decreases; the estate tax marital deduction; assets included in an estate for estate tax purposes; life insurance as part of the estate for estate tax purposes; 529 education plan accounts; and Will and trust provisions designed to save estate taxes including the differences between trusts created by a surviving spouse’s disclaimer and trusts established under a formula provision included in the Will.

Part Three (and the Part Three Q&A): common mistakes made in estate planning; jointly owned assets; things to consider when selecting Executors, Trustees and Guardians; retirement plan accounts (IRAs, 401(k), 403(b), etc.); how rules relating to required minimum distributions from retirement accounts affect the drafting of Wills, trusts and beneficiary designations; and life insurance and irrevocable life insurance trusts to provide estate liquidity.

Part Four (and the Part Four Q&A): revocable living trusts; incapacity planning; probate avoidance; the probate process; controversial estate plans and other reasons to use a revocable trust; and nonreasons for using revocable living trusts.

Part Five (and the Part Five Q&A): gift planning; gift tax exemptions; exclusions from taxable gifts; the marital deduction; gifts of life insurance and irrevocable life insurance trusts; proposals for estate tax reform and changes to estate tax exemptions and tax brackets; Roth IRA conversions; making gifts of interests in a home or vacation home; large gifts in 2012 to take advantage of 2012 (current) large exemptions.

Each part is a slightly condensed version of the more detailed slideshow type presentation you can find here:

The slideshow presentation is more detailed and  includes more subjects relevant to planning for New York residents but has no Q&A. 

We hope you find this information helpful.

Posted on 10/8/2012 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.

Basic Estate Planning Seminar With Extended Q&A Format

July 5, 2012

LocationMatrix Corporate Center, Sunset Vista Room, Fourth Floor, 39 Old Ridgebury Road, Danbury, CT

Directions:  Directions to Chipman MazzuccoDon’t rely on your GPS.  Please read and follow these directions.

Date:  July 26, 2012

Time:  5:30 to 7:30 pm (Doors open at 5:00)

Register here:  Seminar Registration.  Or, call 203-744-1929 for reservations.  For more contact information, go to the end of this post.  

No admission charge.  Our seminars are always strictly educational.

Description

We will cover the topics listed below.  Each listed Part corresponds to a Part in our Basic Estate Planning Video which you can see on YouTube here:  Basic Estate Planning Video.  If you would like to have the video on DVD, please let us know and we will send you one.

The Seminar will have four sections.  Each section will summarize topics covered in the video.  Q&A will follow each section.

To get the most out of the seminar, attendees should view the whole video before attending.  We understand that time may not permit that, however, and we are structuring the program to make certain it will be well worth your time even if you do not view the video.

Send Us Your Questions

If you think of a question before the seminar, let us know right away before you forget.  If the question is appropriate for a group educational program, we will try to answer it during the program.  Send your questions here: rsl@danburylaw.com (Richard S. Land) or here ksg@danburylaw.com (Kasey S. Galner).

 Seminar Topics

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).

SEMINAR LOCATION AND TIME

The seminar will be on July 26, 2012, at the Matrix Corporate Center, Sunset Vista Room, Fourth Floor, 39 Old Ridgebury Road, Danbury, Connecticut from 5:30 p.m. to 7:30 p.m. The doors will open at 5:00. Refreshments will be served.

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 (203-744-1929) or send an e-mail message to me (Richard Land at rsl@danburylaw.com) or Kasey Galner (at ksg@danburylaw.com) or Lynn D’Ostilio (at lsd@danburylaw.com) containing your name, number attending, telephone number and e-mail address.

You may also register here: Seminar Registration.

 Posted on 7/4/2012 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.

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.

     
  Join Email List  
     

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Basic Estate Planning Seminar

March 29, 2012

Our Basic Estate Planning Seminar is Now a Screencast

Background

March 28, 2012

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.  We offer it to you now as a screencast/podcast.  It is also available on DVD. If you would like the DVD, please contact us (via Chipman Mazzucco).

You can see all 15 parts.  Click on the red “Basic Estate Planning (15 Parts)” heading below and then click “Play All” under “Basic Estate Planning” at the top of the YouTube page.

Basic Estate Planning (15 Parts)

We describe each of the parts below with an individual link to each one. If the full screen button on the bottom right of the icon is not working, click on “For Full Screen Click Here.”

Part 1:  Introduction.  Wills and probate property vs. nonprobate property. For a Full Screen Click Here.

  

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

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

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.  For Full Screen Click Here.

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

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. For Full Screen Click Here.

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. For Full Screen Click Here.

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. For Full Screen Click Here.

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

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. For Full Screen Click Here.

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. For Full Screen Click Here.

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. For Full Screen Click Here.

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. For Full Screen Click Here.

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. For Full Screen Click Here.

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). For Full Screen Click Here.

Posted on 3/29/2012 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.

     
  Join Email List  
     

Chipman Mazzucco | Promote Your Page Too

December 8, 2011, Seminar: Planning Your Whole Estate

November 12, 2011

Planning Your Whole Estate—Coordinating Life Insurance, Employee Benefits, and Other Nonprobate Property with the Rest of Your Estate Plan

LocationMatrix Corporate Center, Main Auditorium, First Level, Danbury, Connecticut, 39 Old Ridgebury Road, Danbury, CT

Directions:  Directions to Chipman MazzuccoDon’t rely on your GPS.  Please read and follow these directions.

Date: December 8, 2011
 
Time: 5:15 to 6:45 pm.

Call 203-744-1929 for reservations.  For more contact information, go to the end of this post.

The Last Will and Testament is usually the keystone of an estate plan. It contains the most important instructions for your survivors regarding the use of your assets after your death.

Unfortunately, many people are not aware that a Will usually will not control the disposition of nonprobate assets such as life insurance death benefits, retirement accounts such as 401(k) and IRA plans, annuities, jointly owned property and many other benefits provided under plans offered to employees as part of their employment package.

Unless you properly designate beneficiaries for nonprobate assets and coordinate them with the terms of your Will:

• Your estate plan may be largely ineffective
• Your heirs may pay taxes that could have been avoided
• Family conflict may ensue
• A young beneficiary may receive significant assets too soon 

In addition, unique income tax rules apply to many nonprobate assets. Without proper planning, income tax saving opportunities can be lost and tax traps may ensnare the unwary.

At the seminar, we will be discussing issues related to planning for nonprobate assets and how to coordinate the disposition of such assets with the terms of your Will (or Will substitute such as a revocable living trust).

Go here for a flyer about the seminar: Planning Your Whole Estate—Coordinating Life Insurance, Employee Benefits, and Other Nonprobate Property with the Rest of Your Estate Plan.

SEMINAR LOCATION AND TIME

The seminar will be on December 8, 2011, at the Matrix Corporate Center, Main Auditorium, First Level, 39 Old Ridgebury Road, Danbury, Connecticut from 5:15 p.m. to 6:45 p.m. The doors will open a little before 5:00. Refreshments will be served.

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 (203-744-1929) or send an e-mail message to me (Richard Land at rsl@danburylaw.com) or Kasey Galner (at ksg@danburylaw.com) or Lynn D’Ostilio (at lsd@danburylaw.com) containing your name, number attending, telephone number and e-mail address.

Posted on 11/12/2011 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.

Join Email List

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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.”

Avoiding the Trustee’s Worst Nightmare

September 4, 2011

The Trustee’s worst nightmare is to be cross-examined by a blood thirsty litigator whose sole goal is to make the Trustee look as bad as possible. The Trustee thwarts the litigator’s attacks by paying close attention to the standards of fiduciary conduct that govern the Trustee’s activities and by creating an organized and detailed record of the Trustee’s deliberations and transactions.

The purpose of this post is to describe the steps the new Trustee should take to get started on the “right foot.” It is based on a publication by LawFirst Publishing entitled “The Trustee’s Guide” and is meant only to provide general guidance. Management of your trusts must take the specific terms of the trusts into account as well as the general principles described in this post.

For previous posts regarding trusts, go here: The Benefits of Trusts and Special Needs Trusts.

A. Background

A settlor (creator of a trust) may form a trust through a will or through a trust instrument. Either way, a trust is a legal device that allows a Trustee, the legal owner of the trust property, to manage the property for the benefit of one or more beneficiaries, the equitable owners of the trust property. The Trustee owes several duties to all the beneficiaries of the trust. Frequently, the beneficiaries of the income are different from the beneficiaries of the principal. This has important ramifications for accounting and investment purposes.

B. Trustee Duties

The Trustee has the duties summarized below:

1. Duty of Loyalty

Except for reasonable compensation for serving as Trustee, a Trustee may not receive a personal benefit from a transaction or decision. The Trustee administers the trust solely in the interest of the beneficiaries. A Trustee may not engage in self-dealing without court approval.

2. Duty to Deal Impartially with Beneficiaries

The Trustee has a duty to treat all beneficiaries impartially except when the terms of the trust provide otherwise. Accordingly, the Trustee should be even-handed in the Trustee’s dealings with all the beneficiaries.

3. Duty to Take Possession and Control of Trust Property

If trust property is in the possession and control of a third party, the Trustee has a duty to take necessary steps to take possession and control.

4. Duty to Keep Trust Property Separated

The Trustee has a duty to keep trust property separate from other property. The Trustee is prohibited from commingling trust property with the Trustee’s own property.

5. Duty to Preserve the Trust Property

The Trustee has a duty to protect the trust property from loss or damage. This will take different forms with different assets: insurance coverage for real and tangible property; safe deposit boxes and custodian arrangements for securities; and climate control for paintings, etc. The Trustee should not engage in speculative investing.

6. Duty to Make Trust Property Productive

The Trustee has a duty to convert unproductive property to productive property unless the terms of the document provide otherwise.

7. Duty to Pay Income to the Income Beneficiary

Unless the terms of the trust provide otherwise (and they frequently do), the Trustee has a duty to distribute income to the trust beneficiaries in reasonable intervals during the term of the trust.

8. Duty to Keep and Render Accounts

The Trustee has a duty to keep clear and accurate accounts showing in detail the nature and value of all the trust property and how the property has been administered.  Go here for a sample of a Trustee’s account:  Sample Trustee’s Account.

9. Duty to Furnish Information

The Trustee has a duty to satisfy a beneficiary’s reasonable requests for information. See Section F.2. below.

10. Duty to Exercise Reasonable Care and Skill

The Trustee has a duty to exercise the same skill and care that someone with ordinary prudence would exercise with respect to his or her own property. In addition, pursuant to Connecticut law, when investing and managing trust property, the Trustee has a duty to do so in accordance with the “prudent investor standard” as defined in the Connecticut Uniform Prudent Investor Act starting at Section 45a-451 of the Connecticut General Statutes (copy attached). Pursuant to New York law, when investing and managing trust property, the Trustee has a duty to do so in accordance with the “prudent investor standard” as defined in Section 11-2.3 of New York’s Estates, Powers and Trust Law (copy attached).

11. Duty Not to Delegate

The Trustee is personally responsible for exercising his or her judgment as Trustee. The Trustee cannot avoid responsibility by delegating such responsibility. With respect to investment management, however, the Trustee who lacks the skill and experience to manage investments is well-advised to retain competent investment professionals.

12. Duty to Enforce Claims

The Trustee has a duty to use reasonable efforts to enforce the trust’s claims.

13. Duty to Defend Actions

The Trustee has a duty to take reasonable steps to defend the trust property against the claims and actions of others.

C. Initial Set Up of Trust

1. Accept or Decline Appointment

Until you accept your appointment as Trustee, you are under no obligation to administer the trust. You may indicate acceptance in writing or by performing acts as Trustee. To decline appointment, you should complete a simple written statement that notifies the court or appropriate person of your intentions. The remainder of this post presumes that you already have accepted or plan to accept your appointment.

2. Gather Documents

To properly administer the trust, you will need to assemble the following documents shortly after accepting your appointment:

i. The trust instrument, which may take the form of an original of the trust agreement, a certified copy of the will, or a certified copy of a court decree establishing the trust.

ii. The following, if provided under a document other than the trust instrument:

a. An original of your written appointment as trustee.

b. An original of the agreement (if any) concerning your compensation as Trustee.

iii. Contact information for each beneficiary, including full names, Social Security numbers, dates of birth, and home and business addresses, telephone numbers, and fax numbers.

iv. Deeds to real property transferred to the trust.

v. If the trust was created by a will:

a. A certified copy of settlor’s death certificate.

b. A copy of the estate’s federal estate tax return, if any.

c. A copy of the Connecticut estate tax return.

d. A copy of the executor’s final accounting if the trust is established pursuant to a Will.

vi. If you are replacing a prior trustee:

a. An original of the resignation or the removal of prior trustee.

b. A copy of prior trustee’s accounting.

Original documents, and other important documents, should be kept in a lockable fireproof file cabinet or safe. If you keep records on your personal computer, be sure to back up frequently. Many of the documents listed above, including the trust instrument, deeds, tax returns, and contracts with agents should be retained permanently. Insurance policies should be held for at least three years after their expiration date, while approved accountings should be retained until the trust terminates and the final distributions have been made to the beneficiaries and approved either by the interested parties or by the Court having jurisdiction.

3. Apply for a Federal Taxpayer Identification Number (TIN) for the Trust

Use IRS Form SS-4, Application for Taxpayer Identification Number. If you are the Trustee of a trust created by a will, you still must apply for a TIN even though the estate already has its own TIN.

4. Notify the IRS of Your Position as Trustee

Use IRS Form 56, Notice Concerning Fiduciary Relationship. This form notifies the IRS that you are the Trustee and should be receiving communications relating to the trust. At your discretion, you may also file Form 56 with your first federal tax return for the trust. If you are replacing a prior Trustee, it is essential to file Form 56 in a timely manner so that the IRS can direct communications about any prior delinquencies to you. You should file Form 56 again at the end of your term as Trustee to inform the IRS that the trust relationship has ended.

5. Obtain a Bond if Required

A bond protects the trust in the event that you are unable to make good any losses from your negligence, breach of fiduciary duty or criminal acts. Connecticut and New York laws require Trustees of trusts created by a will to obtain a bond, unless the Will waives this requirement.

The bond will not protect the Trustee against personal loss from a breach (negligent or otherwise) of one of the Trustee’s many duties. Individual Trustees will find it difficult to insure against such loss through a fiduciary liability policy because insurers consider non-professional Trustees to be a high risk.

You can decrease your personal exposure by delegating duties to attorneys, investment managers, tax consultants, and others who qualify for professional liability coverage.

6. Create an Investment Policy Statement

An investment policy statement is a written policy that governs the investment process. While not required, we recommend creating one because it can help you explain to beneficiaries or a court that you constructed and followed a suitable investment program.

Although your investment policy statement must conform to the terms of the trust, you have great flexibility in crafting it. At a minimum, it should cover:

i. Goals and objectives.

ii. Time frames.

iii. Acceptable levels of risk.

iv. Liquidity and income needs of beneficiaries.

v. Types of investments.

vi. Asset allocation strategy.

vii. Selection and monitoring of financial advisors.

viii. Procedures for amendment and review of your investment policy.

7. Meet with the Beneficiaries

As soon as is practicable, you should meet with the beneficiaries. A typical meeting should include a discussion of:

i. The terms of the trust, including any restrictions on investment.

ii. The duties of a Trustee.

iii. Fees and other expenses of the trust.

iv. Tax consequences for the trust and the beneficiaries.

v. Beneficiaries’ preferences for communication.

Additionally, there are a few simple things which you may wish to do to make the meeting run smoothly and to avoid misunderstandings. Consider providing each beneficiary with an agenda, an accordion-type folder containing pre-labeled folders for correspondence, statements, copies of documents, and tax information to ensure that they have easy access to all documentation, and a summary of the meeting in a follow-up letter.

D. Managing Trust Income and Principal

Assuming a the trust is either a Connecticut or New York trust, unless the terms of the trust provide otherwise, all Trustees must adhere to the applicable Prudent Investor Act (see the Connecticut Uniform Prudent Investor Act and the New York Prudent Investor Act). Under such acts, Trustees owe the beneficiaries several duties, including the duty to review the trust assets shortly after receiving them to ensure that they comply with the terms of the applicable Act, to invest the trust assets as a prudent investor would, to diversify investments, to act impartially towards beneficiaries, to consider only the interests of the beneficiaries when investing, and to incur only reasonable investment costs. It sets forth specific factors that Trustees must consider when managing trust assets. Actual return on investments is irrelevant; you are only liable to the beneficiaries for failure to follow the standards of conduct set forth in the Act. An Investment Policy Statement, described above, will aid greatly in compliance with the Act.

Trustees also must adhere to the applicable Principal and Income Act. This Act determines which disbursements the Trustee shall make from income and which from principal.

New York’s Act and Connecticut’s Act are quite different in some important respects. For example, in Connecticut, one-half of the Trustee’s compensation and all of the administrative expenses must be paid from income, while estate taxes and payments on the principal of a trust debt must be paid from principal. In New York, one-third of the regular fees of persons providing investment advisory or custodial services and all of the ordinary expenses relating to administration, management or preservation of trust property must be paid from income, while estate taxes and payments on the principal of a trust debt must be paid from principal. Each of the Connecticut Act and the New York Act has several exceptions and different rules for different types of assets, so it is best for you to obtain proper guidance specific to your situation.

E. Distributions

Distributions take the form of required and discretionary distributions. Required distributions are relatively easy to manage: the trust instrument will specify regularly scheduled distributions or distributions after the happening of an event (such as a beneficiary attaining a certain age). Your power to make discretionary distributions is spelled out in the trust instrument. Whether you are responding to a request from a beneficiary or initiating the distribution on your own, you should document the purpose of the distribution, the source of income, and the possible adverse effects on other beneficiaries.

F. Filing Requirements

1. To the Probate Court

a. Inventory

In Connecticut, if the trust is established pursuant to a decedent’s Will, you will need to file an inventory with the Probate Court having jurisdiction over the settlement of the decedent’s estate. An inventory of trust assets includes a description of the trust property, the date received, its adjusted cost basis, and its market value on the date it legally became trust property. You may wish to list assets by category, such as cash, fixed income, common stock, and real estate.

b. Accounting

In Connecticut, if you are the Trustee of a trust created by a Will, you must file an accounting with the Probate Court every three years (unless the will excuses these filings). For other trusts, except for the final accounting, you need only file an accounting with the Probate Court when a beneficiary requests one. In Connecticut, all Trustees of trusts established pursuant to a decedent’s Will must file a final accounting with the Probate Court when the trust terminates. An accounting provides all interested parties with complete transaction information regarding the contents of the trust, including all receipts and disbursements.  For a sample of a Trustee’s account, go here:  Sample Trustee’s Account.

2. To the Beneficiaries

You have a duty as Trustee to provide a beneficiary with information the beneficiary reasonably requests about the nature and value of the trust property and information needed to enforce the beneficiary’s rights under the terms of the trust. The Trustee is required to satisfy only those requests that are reasonable based on the circumstances.

The terms of the trust frequently include instructions to the Trustee regarding periodic reporting to the beneficiaries of the trust. The Trustee has a duty to follow such instructions.

3. Tax Returns and Taxes

a. On Behalf of the Trust

Trust income is subject to taxation. The Trustee is responsible for filing federal and State income tax returns on a calendar year basis. The Trustee is also responsible for making estimated tax payments.

Keep in mind that the maximum tax bracket for trusts (35%) applies when a trust’s taxable income exceeds a mere $11,200. When computing the taxable income of a trust, the trust is entitled to deductions related to income distributions from the trust. A beneficiary who receives income distributions from a trust is required to report such income on the beneficiary’s income tax return. The Trustee is required to provide this information to the beneficiary and the tax authorities as part of the income tax returns which the Trustee must file.

Tax laws are complex and change frequently. A Trustee who lacks skill and experience in fiduciary income tax matters should retain the services of a tax professional.

b. On Your Own Behalf as Trustee

For tax purposes, a Trustee is a self-employed individual. Therefore, you will have to file Schedule C, Profit or Loss from a Business, with your federal income tax return Form 1040. If you already file Schedule C for a different business, you will need to file a separate Schedule C for your activities as Trustee.

Trustee fees are earned income and as such, they may change your tax bracket or affect your eligibility for Social Security benefits. If your net profit on Schedule C exceeds $400, you will have to file Schedule SE, Self Employment Tax. If you show a net loss on Schedule C, you may be able to offset other income on Form 1040. Again, we recommend that you consult with a tax advisor regarding these issues.

Posted on 9/4/2011 by Richard S. Land, Member,  Chipman, Mazzucco, Land & Pennarola, LLC.

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Congress Converted Your Federal Estate Tax “Exemption” to an Asset You Can Transfer.

July 12, 2011

As a result of legislation enacted last December, each of us has a federal estate tax “exemption” of $5,000,000. The first reaction of many might be, “So what? I have nothing to tax anyway. This means nothing to me.”

If you are married at the time of your death, however, your $5,000,000 estate tax “exemption” can be transferred to your surviving spouse. As a result, your surviving spouse could have an “exemption” of as much as $10,000,000 (your spouse’s “exemption” plus your “exemption”). Potentially, your “exemption” could save a surviving spouse from $1,500,000 to $2,500,000 in federal estate taxes.

To transfer your “exemption” to your surviving spouse, your Executor must file a federal estate tax return by its due date (nine months after your death unless an extension is requested). If your Executor fails to file the return and make the election, the opportunity to transfer the exemption to your surviving spouse is lost. Problem:  As of July 25, 2011, the IRS has not issued an estate tax return form that includes the election.  Executors of decedents who died early in 2011 should consider filing, before the due date for the return, a request for an extension of time to file the return to preserve the ability to make the election.

Not only will the new portable exemption be a new and useful estate planning tool, the “exemption” probably will be considered when negotiating many prenuptial agreements. It is not a stretch to imagine the lawyer of the wealthy groom-to-be asking his client’s betrothed to make certain her Executor will make the “exemption” election after her death.

It is also not too much of a stretch to think that some wealthy bachelors and bachelorettes may seek out singles with unused “exemptions,” short life expectancies, and no assets, as ideal marriage partners.

Look at it from this slightly different perspective. Imagine that your spouse passes away this year with no assets. You (the surviving spouse) expect to receive a large inheritance in the future when your parents pass away. The inheritance from your parents will push the size of your estate well above $5,000,000 (the size of your exemption).

In such a case, the exemption of your deceased spouse would be very important in shielding your estate (augmented by the inheritance you receive from your parents) from estate taxes at your death; and, as the Executor of your spouse’s estate, you should file a federal estate tax return within nine months after your spouse’s death to claim your spouse’s unused exemption even though your spouse’s estate has no value at all.

The current federal estate tax rules, including the rules relating to the portable exemption, are temporary and are scheduled to expire on January 1, 2013. Estate planners expect Congress to act to prevent expiration of the current rules or to enact different rules. In the meantime, while waiting for Congress to give us a permanent set of rules, it makes sense to take steps to preserve the portable “exemption” for the surviving spouse by filing estate tax returns for the estate of the deceased spouse even when the estate has no value.

Posted on 7/9/2011 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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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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