◙ Recent Developments: The most
dramatic changeup in years was the 2010 Tax Act. Its impact over the next 2
years is a wild pitch. This new season requires every estate plan with a
substantial amount of wealth to be revisited especially in light of the $5M
exemption. Any document with a formula may no longer be appropriate. Assume you
signed a will in 2008 and Husband had $8M and Wife had $2M. At the time the
unified credit was $2M. A formula clause would have meant $2M in a bypass trust
on Husband’s death and $6M in a marital trust (QTIP). Assuming no change in
assets wife would have $6M in a QTIP + $2M in her estate. If she died in 2011
she would have $5M of exemption and a taxable estate of only $3M (out of $10M).
This plan might have been a good plan at the time. But in 2011 this plan could
be a foul ball. The formula clause $5M goes into a bypass trust and Wife gets
$3M outright. Wife has $2M of her own
and her estate. But what if the bypass trust excluded the spouse? This might
have been fine at $2M. But now at $5M the kids from a prior marriage get $5M
and the spouse only $3M. This might not have been the game plan. Based on these
numbers in some states the wife might have a spousal right of election. These
are the hidden issues in the new tax law.
Many estates have GST trusts to take advantage of GST exemption. This has increased for 2 years to $5M. If your will has the formula from 2008 when the GST exemption was only $2M and now it is $5M you might be leaving more to grandchildren than to your children. In fact with the same $10M estate from the above example, you could leave it all to your grandchildren!
Portability is a sham since it’s only available in 2011-12. It gives some immediate gratification but not the long term security of a bypass trust. The bypass trust gives you more protection: asset protection depending on how drafted and the jurisdiction. Main issue is when you carve out bypass trust, no matter how high it grows, it is not taxable. In contrast with portability the amount exempt from tax is fixed on the first death. With portability you can’t really control the ultimate disposition of the assets. You could use a will contract but there have been too many cases challenging the enforceability of the contract and what assets are covered. See Matter of Murray NYLJ April 27, 2011, 2nd Dept. 2011 which addressed similar issues. There are also issues concerning the survivability of the spouse and the growth of assets. There are a lot of flaws in portability.
◙ Generation Skipping Tax: Finding the sweet spot is tricky with the fluctuations in the GST exemption amount. The idea of planning for GST with a $1M GST exemption is in a different league then GST planning with a $5M - or $10M if a husband and wife team hit double. You don’t want to make poor children and rich grandchildren. Consider multigenerational trusts, but include the child not just the grandchild, to avoid triggering GST. In a discretionary trust the goal is to use it for a skip person (grandchild) but if your son has financial adversity you may want that money available to help him too. Exemptions went up during a period when net worth declined due to the economy. If people don’t review their documents, the dispositive provisions could prove disastrous.
◙ Elder Law: Medicaid planning should be left to real experts and should not be something to dabble in. The law changes almost every legislative session. It is a combination of not only federal and state law but often county practice. People need to get a local adviser that specializes in this given the intricacies of Medicaid qualification. Do not inadvertently leave a legacy, either outright or in trust, that might disqualify someone for Medicaid or SSI. Grandparents may not know the status of a special needs grandchild, or it may be too painful for them to admit to, and the planning steps could be missed.
◙ Asset Protection: You generally cannot force a discretionary trustee to distribute. See In Matter of Escher, 438 N.Y.S.2d 293 (1981). Asset protection planning is a moving target. You have domestic and offshore planning. The US and in particular the IRS attitude towards offshore accounts is worrisome for asset protection planning. Some people have become concerned about all the filing requirements and that it has cast a negative view. Domestic asset protection – Delaware as an example is comfortable. The state legislature is quick to fix any problems that arise in the law. Domestic asset protection generally requires a corporate trustee and for some clients that is uncomfortable. This continues to be a developing area of the law. There remains the issue about the enforceability of one state’s judgment in another. Andy Pettitte was known for his moves to first base which were about the closest a pitcher can get to committing a balk without violating the rule. Finessing asset protection planning can require similar precision.
◙ Charitable Planning: If anyone says charitable giving will be increased because of the exemptions, they’re missing the point. The increased gift and estate exemption has decreased the tax benefit for giving. This has a negative impact on giving, especially testamentary giving. The government has traditionally favored voluntarism and this undermines it. All our usual charitable giving techniques are still there, just used less. The big thing in charitable giving is being able to give $100,000 if over 70 ½ from an IRA without any income limit. It is a great technique but right now only applies for one year, 2011. Hopefully it will be extended. IRA donations count toward your required minimum distribution (RMD). You don’t get a charitable deduction, but it is not included in income. The donation must be to a public charity. This is not the big number compared to large planned gifts but if you consider the number of people who might take advantage of it overall this could be a huge help to many charities.
◙ Distribution Strategies: Fiduciaries face a real issue as to how to invest in such a complex and volatile investment world. In the old days there was an approved or “legal” list. Now you have an endless array of possible investments and under the Prudent Investor Act there is no investment that is per se imprudent. That takes a lot of hand eye coordination. We are seeing a growth of litigation against fiduciaries. They must study the instrument carefully. There are a lot of lawsuits about non-diversified portfolios. Just because the stock came out of a long term family holding is not enough. Another area of interest is a unitrust or power to adjust. These rules vary considerably by state. Because beneficiaries are not getting the income return they need because of low interest rates, we see more people using unitrust payments which are statutorily between 3-5%. But what happens if interest rates spike? They could be getting much less than appropriate years from now. The unitrust approach could prove shortsighted. If you have a power of invasion you should not have to use the unitrust or power to adjust provision since the power to invade was meant to cover this. Transfer tax consequences could be a problem without an independent trustee. If the governing document does not provide for an ascertainable standard, it is a tougher job for the fiduciary. Flexibility in administration often means reliance on a bank that in many cases the client never knew.
◙ Low Interest Rate Environment: The July AFR is about 2.4% and lower rates can be charged on loans. That’s like getting A-Rod for a salary of a mere $10M. The current low rates and the 2010 Tax Act create huge opportunities. Sales to a grantor trust are a great opportunity. In a low interest environment it may be a time and place to consider forgiveness of loans. Charitable lead trusts work great in this environment and should be reviewed. 7th inning stretch get a beer and run back.
◙ Post-Death Elections: 6166 election is a great opportunity for clients with real estate or their own businesses. You have to work hard sometimes to get an estate into a structure to qualify to defer estate tax for 14 years. Qualifying also permits paying interest at a low rate of 45% of the then applicable IRS interest rate, although without an estate tax or an income tax deduction for the interest paid. It is a way to avoid the fire sale on family businesses or real estate. Section 303 redemptions, disclaimers, and even going to court to reform a will or trust, are all important to consider. Election of fiscal years for estates (not trusts) may provide another opportunity.
◙ Domestic Partners: New York will hopefully pass a gay marriage act. This is a developing area of the law with fascinating issues. Same sex divorce is a developing area. Domestic partners won’t qualify for joint federal income tax returns, the estate tax marital deduction and so on, because of DOMA. The Federal government said it won’t pursue DOMA so this raises even more issues. Few states recognize same sex marriages. New Hampshire/Vermont recognize a marital deduction for domestic partners for state estate tax purposes. Caution is in order. It’s harder to get out of a marriage then to get out of a non-marital relationship so making a transfer to take advantage of the current $5M gift exemption – you need to think about. Family members are often not happy about the relationships and the likelihood of will contests and litigation is significantly greater than for married couples.◙ Internet Age: Estate internet issues are about as cutting edge as you can get. When you gave someone rights in your book does it include electronic rights? When you interview a client for an estate plan do you ask them for access codes for computers? Do you know what to do with it? Your client’s life is in a machine and you may not get access to it. What is the value of intellectual property? Transferability of it is also an issue. *Yeah we needed the bottom of the 9th so readers could experience a walk off win with Sandy’s exciting planning ideas.
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