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“I Don’t Need a Will”—Common Misconceptions Regarding the Necessity of Wills in Connecticut

November 5, 2011

1. “My spouse and I don’t need Wills because, if one of us dies, the surviving spouse will inherit everything automatically.”

While this may be true for property that is held jointly with rights of survivorship or property that passes by beneficiary designation (a/k/a non-probate property), this is not always the case for property that is held in the deceased spouse’s sole name (a/k/a probate property).

If you are married and your spouse dies without a Will, you may not receive all of your spouse’s property. In fact, your IN-LAWS could receive a portion of your spouse’s probate property (which is not what many people would intend). For example, the following table illustrates what happens if your spouse dies without a Will in Connecticut, with probate property worth $1,000,000, based on the following circumstances:

You Receive

Children Receive

Spouse’s Parent’s Receive

If you and your spouse have no children

$1,000,000

n/a

If you and your spouse have children

$550,000

$450,000

n/a

If you and your spouse have children and one or more of the children are your spouse’s from a prior marriage

$500,000

$500,000

n/a

If you and your spouse have no children and your spouse has surviving parents

$775,000

n/a

$225,000

Based on the table above, consider the following scenarios:

a. Your spouse dies and you have a two-year-old child. Your two-year-old child will receive an inheritance of $450,000 and you will receive $550,000.

b. Same example as above except the two-year-old child is your spouse’s child from a prior marriage. The child will receive even more, $500,000, and you will receive $500,000.

c. You and your spouse have no children, but one or both of your spouse’s parents survive your spouse. No matter how you feel about your in-laws, they will receive $225,000 (a quarter of your spouse’s probate property).

In addition, if you and your spouse do not have Wills, you could lose out on some significant tax planning and asset protection planning opportunities. For a detailed discussion about tax planning and asset protection planning see our previous articles (Special Needs Trusts, Making Use of Estate Tax Marital Deductions and Estate Tax Exemptions in 2010–To Be Updated).

2. “I don’t need a Will because I am not married and I have no children so everything will pass to my siblings, right?”

If you are single and you die without a Will in Connecticut with probate property worth $1,000,000, the following table illustrates how such property would be distributed based on the following circumstances:

	Children Receive	Parents Receive	Siblings Receive	Nieces & Nephews Receive	Next of Kin Receives
If you have children	$1,000,000
If you have no children and one or more parents survive you	n/a	$1,000,000	$0	$0	$0
If you have no children, no surviving parent, but surviving siblings	n/a	n/a	$1,000,000	$0	$0
Same as above, except no surviving siblings but surviving nieces/nephews	n/a	n/a	n/a	$1,000,000	$0
No children, parents, siblings, nieces or nephews	n/a	n/a	n/a	n/a	$1,000,000

As illustrated above, if you do not have children and die without a Will in Connecticut, your parents will receive your property, if your parents survive you. For some people, leaving property to their parents is not a problem. However, consider the following scenarios:

a. Your parents are in a nursing home and rely on government benefits to cover the cost of their nursing home care. Any inheritance that they receive from you will cause them to lose their government benefits. They will have to spend the inheritance on their nursing home care and, if any assets are left when they pass away, the state may be entitled to the remainder.

b. Your parents have large estates and they may have an estate tax problem when they die. Any inheritance they receive from you could push their estates over the applicable estate tax exemption and could result in a potentially large estate tax when they die.

c. Your parents are doing fine but your brother is struggling to make ends meet with three kids to support. Without a Will, your brother will not receive any inheritance from you if your parents are still living.

If the last row of the table above applies to you and you die without a Will, your next of kin will inherit your property. This could mean that distant cousins you have never heard of will share equally with cousins you have known all your life. In addition, your Administrator will have the responsibility of locating your heirs and proving to the Probate Court that no other heirs exist. Proving a negative can be a costly and time consuming endeavor. Some Probate Courts will require your Administrator to hire an heir search firm (and pay the costs of such firm out of your estate).

3. “I don’t need a Will because I don’t have any assets, so why waste the time and money?”

Appointing a Guardian

If you have minor children, the most important reason to have a Will, regardless of your net worth, is to name a Guardian who will take care of your children when you and the other biological parent have passed away. If you do not have a Will that appoints a Guardian, the Court will appoint someone for you. Most people do not want to leave this kind of decision up to the Court’s discretion.

Appointing an Executor

If you have no Will, the Probate Court will have to appoint an Administrator to settle your estate. The Court will typically look for a family member to be the Administrator. However, you will have no control over who that family member will be. Your estranged untrustworthy cousin may be the only family member who lives nearby.

Instead of letting the Court choose who has control over your assets when you pass away, you can name an Executor (and back-up Executors) in your Will. Besides being able to control who will control your assets when you die, naming an Executor makes the estate settlement process quicker, easier, and less costly.

Posted on 11/5/2011 by Kasey S. Galner, Associate, Chipman, Mazzucco, Land & Pennarola, LLC.

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Categories: Elder Law Planning for Incapacity and Long Term Care, Estate Tax and Estate Planning Developments
Tags: estate planning, wills

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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.


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Categories: Elder Law Planning for Incapacity and Long Term Care, Estate Tax and Estate Planning Developments
Tags: bypass trust, elder law, estate planning, estate settlement, estate tax, estate tax exemption, exemption trust, marital deduction, marital trust, portable exemption, QDOT, QTIP, revocable trusts, transferrable exemption, wills

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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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Categories: Estate Settlement, Estate Tax and Estate Planning Developments
Tags: bypass trust, capital gains tax basis, carryover basis, credit shelter trust, estate planning, estate settlement, estate tax, estate tax exemption, exemption trust, marital deduction, marital trust, QDOT, QTIP, revocable trusts, step up in basis, tax basis, wills

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The Benefits of Trusts

February 10, 2011

Trusts offer many advantages including asset management, protection from creditors and protection from taxes at more than one generation level. They can be drafted in a variety of ways. Trusts can be used as a gifting tool, established during life, or included in a Will, to be established after death. What type of trust a client will use will depend on the situation including the ages, abilities and resources of the beneficiaries of the trust.

For example, if you are married and considering making a large gift while the gift tax exemption is $5,000,000, the gift could be to a trust which includes your spouse (as well as children, grandchildren and even younger generations) as a beneficiary. This type of trust is frequently called a “Spousal Access Trust.” Your spouse could be a Trustee of the trust (ideally with one or more other Trustees) and your spouse could receive benefits from the trust. As a result, the income need not be totally lost to your household (at least as long as your spouse is living).

The terms of your Spousal Access Trust could grant your spouse significant powers to determine how the trust assets and income would be used to provide benefits for other beneficiaries, including the power to dispose of the trust assets according to the terms of your spouse’s Will (so long as the power is properly limited). If properly drafted, the trust would be sheltered from estate, gift and generation skipping tax at the time of your spouse’s death and at the deaths of your children and their children.

Trusts can also be included in your Will as an important tax-saving device. For a discussion about the potential tax-saving features of trusts, go here: January 10, 2010 post.

In addition, a trust may be the best way to provide a benefit for someone who is not up to managing assets. For example, trusts can be used to protect trust assets from a beneficiary’s creditors and to exclude trust assets from consideration if the beneficiary needs to apply for government assistance (like Medicaid to help cover the costs of long-term care). For more information about this type of trust, go here: Special Needs Trusts.

Trust Basics – What You Should Know

(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) Depending on the client’s goals, the trust can be drafted to severely limit beneficiary influence and access or to generously maximize the beneficiary’s influence and access.

(3) 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.

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

(5) A trust can be drafted containing an endless variety of provisions to accomplish many different goals.

Posted on 2/10/2011 by Kasey S. Galner, Associate, Chipman, Mazzucco, Land & Pennarola, LLC.


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Categories: Estate Tax and Estate Planning Developments
Tags: bypass trust, credit shelter trust, estate planning, estate tax, estate tax exemption, estate tax repeal, exemption trust, living trusts, marital trust, revocable trusts, special needs trusts, wills

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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.


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Categories: Estate Tax and Estate Planning Developments
Tags: carryover basis, estate planning, estate tax, estate tax exemption, exemption trust, step up in basis, tax basis, wills

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No Tax Clawback Pursuant to Section 304 of TRUIRJCA

February 9, 2011

In our post entitled Two Year Planning Window of Opportunity for Large Gifts we invited you to come here for the legal reasoning behind the conclusion that there will be no tax clawback with respect to the estates of clients who die after 2012 and who make large gifts in 2011 or 2012.

We can take no credit for the brain work involved in reaching this conclusion. Rather, we must give credit to Dan Evans who published a newsletter on the topic via the fabulous resources of Leimberg Information Services (http://www.leimbergservices.com/blogwatch.cfm#). That conclusion has been confirmed via Paul Caron, editor of the TaxProf Blog, reporting on the opinions of tax experts participating in a BNA Tax & Accounting Webinar scheduled for February 10, 2011.

Nevertheless, we closely examined the rationale presented by Mr. Evans before being able to agree with his conclusions and the conclusions of other experts.

This is the rationale.

Section 304 of the legislation enacted in December by Congress (bearing the name of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA)) says:

Section 901 of the Economic Growth and Tax Relief Reconciliation Act of 2001 shall apply to amendments made by this section [sic: title].

Section 901 (Sunset of Provisions of Act) of EGTTRA says:

(a) IN GENERAL.—All provisions of, and amendments made by, this Act shall not apply—

(1) …

(2) In the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2010.

(b) APPLICATION OF CERTAIN LAWS.—The Internal Revenue Code of 1986…shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted.

Accordingly, after 2012 the provisions of EGTRRA do not apply and the provisions of the Internal Revenue Code must be applied as if EGTRRA were never enacted. We will refer to the law as if EGTRRA were never enacted as Pre-EGGTRA law.

Although we will describe the calculation in more detail below, keep in mind that the U.S. estate tax is computed by adding the value of the estate to the value of taxable gifts to arrive at a Tentative Tax Base. The Tentative Estate Tax is determined based on the Tentative Tax Base. To determine the U.S. estate tax, the Tentative Estate Tax is then reduced: (1) by the gift tax obligation related to the gifts that were made; (2) the unified credit against the estate tax (this is the credit that results in what we refer to as the estate tax exemption); and (3) a credit for state estate taxes paid (other credits also may be available for special situations).

At issue when discussing the possibility of an estate tax clawback is how to compute the reduction for the gift tax obligation referred to above in red.

The gift tax obligation is a function of the unified credit and the gift tax rates. The unified credit after 2012, according to Pre-EGTRRA law, is $345,800 (resulting in what is often referred to as a $1,000,000 estate and gift tax exemption). As mentioned above, the unified credit is applied against a Tentative Estate Tax (and gift tax) to arrive at the actual tax due. Under pre-EGGTRA law, the tentative gift tax on a $5,000,000 taxable gift would be $2,390,800. To arrive at the tax due, the unified credit of $345,800 (the credit which would apply if EGTRRA had not been enacted) would be applied against the tentative gift tax to arrive at the gift tax of $2,045,000. This is the tax that would have been due if the rules were applied as if EGTRRA were never enacted. Of course, if the gift is made in 2011 or 2012 there would be no actual gift tax to pay because the exemption in those years is actually $5,000,000.

In computing the estate tax on the estate of the client who dies in 2013 after making a gift of $5,000,000 in 2012, the tentative estate tax is computed on the sum of the taxable estate and the taxable gifts. In this case such sum would be $10,000,000 which is referred to as the tentative tax base.

The tentative tax on a tentative tax base of $10,000,000 is $5,140,000.

Section 2001(b)(2) of the Internal Revenue Code says that in determining the estate tax the tentative tax is reduced by “the aggregate amount of tax which would have been payable under chapter 12 [the gift tax chapter] with respect to gifts made by the decedent after December 31, 1976, if the modifications described in subsection (g) had been applicable at the time of such gifts.”

The modifications described in subsection (g) are modifications enacted as part of TRUIRJCA and would have been applicable at the time of the 2012 gift. Accordingly, for purposes of computing the reduction under 2001(b)(2), the reduction is the gift tax that would have been payable, not the gift tax actually paid.

The estate tax is being calculated in 2013 (the assumed year of the client’s death) after the provisions of TRUIRJCA have sunsetted. Because Section 304 of TRUIRJCA says that the sunset rules of Section 901 of EGTRRA apply, the pre-EGTRRA law applies to both the estate and gift tax calculations.

The final calculation therefore looks like this:

(1) The Taxable Estate of $5,000,000 and the Taxable Gift of $5,000,000 would be added together to arrive at the Tentative Tax Base of $10,000,000.

(2) The U. S. Tentative Estate Tax on a Tentative Tax Base of $10,000,000 would be $5,140,800.

(3) To arrive at the U. S. estate tax, the Tentative Estate Tax is reduced by the U.S. gift tax that would have been incurred according the law as it would be if EGTRRA were never enacted in 2001. The gift tax that would have been incurred is $2,045,000.

(4) In addition, the Tentative Estate tax is reduced by the Unified Credit available according to the law that would be if EGTRRA were never enacted. Such a Unified Credit is $345,800. The Unified Credit shelters assets having a value of $1,000,000 from U.S. estate and gift taxes according to the law that would have existed if EGTRRA were never enacted.

(5) The Tentative Estate Tax is reduced further by the Credit for N.Y. estate tax which would be $391,600.

(6) The result of the calculations described above is a U.S. Estate Tax equal to $2,358,400.

As Dan Evans points out, the result is what you would expect if gift tax policies of the past were consistently applied to the current gift tax. He explains that past policy dictated that lifetime gifts were made a part of the estate tax calculation only for the purpose of determining the estate tax brackets to be applied to the estate that remains after lifetime gifts were made. The calculation methodology was never intended to be used as a way to subject lifetime gifts to additional tax.

In the example above, if the policy is properly applied, you would expect that the estate tax on the taxable estate of $5,000,000 would be 55% or $2,750,000. This is exactly the result achieved above when the U.S. estate tax and the New York estate tax are added for a total of $2,750,000.

Posted on 2/9/2011 by Richard S. Land, Member, Chipman, Mazzucco, Land & Pennarola, LLC.


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Categories: Estate Tax and Estate Planning Developments
Tags: estate planning, estate tax, estate tax exemption, estate tax repeal, step up in basis, wills

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March 10, 2011, Seminar. Is it time to review your estate plan? Maron Hotel, Danbury, Connecticut, 7:00 to 9:00 PM

January 29, 2011

Is It Time To Review Your Estate Plan?

Please join us at the Maron Hotel, Danbury, Connecticut, on March 10, 2011.

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

We will be discussing whether clients should be reviewing and changing their estate plans in light of changes Congress recently made in the U.S. estate law and in light of all the other changes that may have occurred in your life and the lives of your beneficiaries and fiduciaries (Executors, Trustees and Guardians) since the last time your plan was reviewed.

For a summary of the topics we plan to cover, including a short explanation of the new U.S. estate tax rules, see the videos (Part One and Part Two) below.

For a good Wall Street Journal summary of the new U.S. estate and gift tax provisions, click here: WSJ Article.

You can find a short written summary of the seminar topics in the text after the videos.

Estate Planning Seminar Summary Video Part One:

Estate Planning Seminar Summary Video Part Two:

Federal Estate Tax Changes: As 2010 came to an end, the U.S. Congress enacted another set of temporary estate tax changes which will apply in 2011 and 2012 with retroactive application to 2010. Under the new set of temporary rules, the U.S. estate tax exemption is increased to $5,000,000 and the top estate tax bracket is 35%. In 2013, however, the U.S. estate tax exemption is scheduled to be $1,000,000. The top U.S. estate tax bracket in 2013 is scheduled to be 55%. Under the new rules, for the first time, one spouse may give his or her unused $5,000,000 estate tax exemption to a surviving spouse. In effect, this means married couples may take advantage of each spouse’s $5,000,000 exemption (for a total exemption of $10,000,000) without including complicated tax provisions in their Wills.

Connecticut Estate Tax: The Connecticut estate tax “exemption” is currently $3,500,000. Because the U.S. estate tax exemption is larger than the Connecticut estate tax exemption, married clients who have wills with marital deduction formula provisions that are pegged to the U.S. estate tax exemption may incur an unnecessary Connecticut estate tax of approximately $122,000.

As we have stressed in previous seminars, the application of many types of estate tax formula provisions in Wills after exemptions have been increased could result in the disinheritance of the surviving spouse unless there has been careful planning.

In addition, many types of estate tax formula provisions in Wills may be difficult to interpret after exemptions have been increased. This could increase the risk of litigation between beneficiaries.

For many, it may be time to use Wills that are much simpler than the complicated estate-tax-formula Wills of the past. The temporary nature of the estate tax changes and the estate tax rules of Connecticut and other states, however, make the analysis less simple.

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.

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.

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

SEMINAR LOCATION AND TIME

The seminar will be on March 10, 2011, at the Maron Hotel, 42 Lake Avenue Extension, Danbury, Connecticut from 7:00 p.m. to 9:00 p.m. The doors will open at 6:30. 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 1/29/2011 by Richard S. Land, Member, Chipman, Mazzucco, Land & Pennarola, LLC.


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Tags: bypass trust, credit shelter trust, estate planning, estate tax, estate tax exemption, estate tax repeal, exemption trust, health care agent, health care directives, incapacity, living trusts, living wills, marital deduction, marital trust, power of attorney, QDOT, QTIP, revocable trusts, wills

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My Spouse Has Passed Away. What Do I Need To Do?

January 28, 2011

When a spouse dies, the survivor will likely feel overwhelmed and may have a difficult time knowing what to do next. The following is a list of basic steps that the survivor will need to take after the loss of a spouse:

√ Contact a funeral home immediately and arrange for the burial and memorial services.

√ Prepare an obituary and consider newspapers for publication.

√ Notify the employer of the deceased spouse.

√ Contact previous employers regarding possible pension or other retirement plans and to determine any survivor’s benefits.

√ Notify the Social Security Administration and any other benefit programs that may be making payments to the deceased spouse or that may be paying a death benefit.

√ Notify family members, friends and acquaintances.

√ Contact your financial advisor.

√ Contact your accountant.

√ Contact your casualty and liability insurance carrier (homeowner and car).

√ Obtain access to the deceased spouse’s safety deposit box (if any).

√ Contact credit card companies.

√ Consider payment of debts. Debts of the deceased spouse should be paid by the deceased spouse’s estate. A mortgage on a jointly owned home generally should be paid by the joint owner.

√ Contact your attorney. This does not have to be done immediately after the death but you should speak to an attorney within two months after the date of death to be sure that you take advantage of important post-mortem planning opportunities. It is best not to make any claims for death benefits under a life insurance policy, annuity, IRA, 401(k) or other type of retirement account before reviewing planning options with a knowledgeable attorney.

√ Gather the following documents:

• The original Will;

• Revocable and Irrevocable Trust Agreements (if applicable);

• Death certificate;

• Marriage certificate;

• Birth certificate;

• Military discharge documents (if applicable);

• Birth certificates of children;

• Deeds for real property;

• Statements relating to bank and investment accounts;

• Life insurance policies

• Title to any vehicles; and

• Any other information regarding assets owned by your spouse.

Your attorney will be able to guide you through the necessary steps to settle your spouse’s estate.

Posted on 1/28/2011 by Kasey S. Galner, Associate, Chipman, Mazzucco, Land & Pennarola, LLC.


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Categories: Elder Law Planning for Incapacity and Long Term Care, Estate Settlement, Estate Tax and Estate Planning Developments
Tags: elder law, estate planning, estate settlement, wills

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Special Needs Trusts

August 6, 2010

Trust management for the inheritance of a disabled beneficiary can be very important. In addition to providing benefits and management for the disabled beneficiary’s inheritance, the goals of such a trust usually include protection of the trust assets from the beneficiary’s creditors and exclusion of the trust assets from consideration if the beneficiary needs to apply for government aid (for example, Medicaid to pay the costs of long term care). When we refer to a Special Needs Trust, we are referring to a trust established to accomplish such goals.

As discussed here, in order for a disabled person to become eligible, and remain eligible, for government benefits like Medicaid and Supplemental Security Income (SSI), the person must meet strict income and asset criteria. The Connecticut Department of Social Services (“DSS”) takes into account all “countable assets” when determining eligibility for benefits. Even after approval for these benefits, any changes in assets or income, even from an inheritance, can disqualify the person from the assistance he or she needs.

DSS considers a trust created for general maintenance and support as a countable asset for Medicaid purposes. On the other hand, a trust created strictly for supplemental needs, if drafted properly, will not be counted and can be a way to provide additional support to family members who rely on government benefits. The main question is whether a trust is a general support trust (counted as an asset) or a supplemental needs trust (not counted).

The answer depends upon what the person who created the trust intended to create. This may sound simple enough, but even if a Will says, “This trust is intended to be a supplemental needs trust,” the court may still find that it is, in fact, a general support trust. The courts look at the language of the trust instrument in its totality to determine the testator’s intent.

The courts weigh most heavily the amount of discretion the Trustee has over trust distributions. In order for a trust to qualify as a supplemental needs trust, the Trustee must have complete discretion over the trust payments including the discretion not to make distributions to the beneficiary. Seemingly harmless attempts to include standards for the exercise of discretion can result in the creation of a general support trust instead of a supplemental needs trust. If a trust includes guidelines regarding the Trustee’s exercise of discretion, the guidelines should be merely precatory—in the nature of expressing a mere “fond hope,” “wish” or “desire.” Any guideline or instruction that is more definite may limit Trustee discretion with the result of jeopardizing the goals mentioned above.

In the case of Zeoli v. Commissioner of Social Services, the Court held that the Trustee had “absolute and uncontrolled discretion,” over any and all distributions. As a result, the trust assets were not countable in determining eligibility for aid. In more recent decisions, like the decision in Rome v. Wilson-Coker, the Court seemed to suggest that “unfettered” should be added to the “absolute and uncontrolled” standard the Zeoli court used.

For instance, whenever a trust has only one beneficiary and the instructions provide that distributions are to be made for the beneficiary’s “best interest and general welfare” or that the trust assets may be used to support the beneficiary in “reasonable comfort,” the Court may hold that the Trustee’s discretion is not unlimited and that it would be an abuse of discretion for the Trustee to withhold payments when needed for general support. In that case, the trust would fail to achieve the intended goals. This was the approach taken by the Rome Court.

Unlike the Rome case, the Zeoli case involved a trust with more than one beneficiary. Its holding suggests that a Special Needs Trust should include multiple trust beneficiaries while giving the Trustee the ability to benefit one beneficiary and exclude others. The beneficiary’s case is even stronger if the terms of the trust provide that the trust is intended to be a supplement to, rather than a substitute for, other resources.

A Special Needs Trust for a surviving spouse must be established under the terms of a Will (not a revocable trust). Even if the trust for the surviving spouse satisfies all the requirements suggested by the Zeoli and Rome cases, if the trust is established under the terms of the revocable trust agreement of the deceased spouse (instead of under the terms of the Will of the deceased spouse), the trust will be considered a countable asset and disqualify the surviving spouse for Medicaid benefits to pay the costs of long term care. Accordingly, if the goals of a Special Needs Trust for the benefit of a surviving spouse are to be achieved, the trust must be established under the terms of a Will; the Probate Court and the probate process must become involved.

Unfortunately, many people have been frightened into believing that the probate process is something that must be avoided at all costs. As a result, they have used revocable lifetime trusts as the primary vehicle for disposing of their assets at death. If the intention of the revocable trust is to create a Special Needs Trust for the benefit of a surviving spouse, however, it will fail to accomplish the intended goals.

A Special Needs Trust can be an essential tool to enhance the life of its disabled beneficiary who is relying on government assistance programs. If drafted improperly, trust assets may be depleted rapidly leaving the beneficiary completely dependent upon an impersonal welfare system which is vulnerable to change at any time.

Posted on 8/6/2010 by Kasey S. Galner, Associate, Chipman, Mazzucco, Land & Pennarola, LLC.

Categories: Elder Law Planning for Incapacity and Long Term Care, Estate Tax and Estate Planning Developments
Tags: elder law, estate planning, incapacity, long term care, long term care insurance, medicaid, nursing homes, revocable trusts, special needs trusts, title 19, wills

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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)

Categories: Estate Tax and Estate Planning Developments
Tags: bypass trust, capital gains tax basis, carry over basis, carryover basis, credit shelter trust, estate planning, estate tax, estate tax exemption, estate tax repeal, exemption trust, marital deduction, marital trust, step up in basis, wills

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Chipman Mazzucco Emerson Estate Planning and Elder Law

Posted tagged ‘wills’

“I Don’t Need a Will”—Common Misconceptions Regarding the Necessity of Wills in Connecticut

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

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

The Benefits of Trusts

Two Year Tax Planning Window of Opportunity for Large Gifts

No Tax Clawback Pursuant to Section 304 of TRUIRJCA

March 10, 2011, Seminar. Is it time to review your estate plan? Maron Hotel, Danbury, Connecticut, 7:00 to 9:00 PM

My Spouse Has Passed Away. What Do I Need To Do?

Special Needs Trusts

The Future of Estate Planning

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