January 17, 2013 – Dispatches From The Front: Comments On Heckerling 2013 and Re-Tooling Estate Plans After January 1, 2013

DISPATCHES FROM THE FRONT: COMMENTS ON HECKERLING 2013

RE-TOOLING ESTATE PLANS AFTER JANUARY 1, 2013: NEW CONVENTIONAL STANDARDS AND STRATEGIES FOR AFFLUENT MARRIED COUPLES WITH A GROSS ESTATE VALUE UNDER $10,000,000 WITH CHARTS TO SHARE WITH YOUR CLIENTS! 

We welcome contributions for future Thursday Report topics. If you are interested in making a contribution as a guest writer, please email Janine Ruggiero at Janine@gassmanpa.com.

This report and other Thursday Reports can be found on our website at www.gassmanlaw.com.

Dispatches from the Front:
Comments on Heckerling 2013

We have thoroughly enjoyed our first three days at the University of Miami Estate Planning Institute.

We are seeing a few common themes:

1. Everyone had a very busy year end.

2. Clients are asking whether they “gifted away too much” or should change what they were gifting.

While the $5,250,000 gifting and estate tax allowances, with inflation adjustments, are much greater than what most of us could have hoped for, we will still continue to face challenging estate tax planning situations for clients questioning their year-end gifts. We have summarized a few key concepts in this section.

1. $5,250,000 invested in an S&P 500 Index Fund in 1981 would have been worth $69,044,326 at the end of 2011. We discuss this in further detail in our Re-Tooling Article below. Typically, investments grow at a rate much higher than the Consumer Price Index.

2. It may be worthwhile to consider having the client “swap assets” with a new irrevocable trust. For example, a client who is in her early 80s who made a $3,000,000 gift to a trust that left her $1,000,000 in personal assets may prefer to have the trust own assets that will not grow in value, such as bank accounts or a low interest promissory note owed to her by a family entity. If she put a leveraged shopping center under the trust and believes that real estate values are going to recover, she may now want to buy the leveraged property from the trust in exchange for her remaining cash and bond investments to have a better economic situation if she feels so inclined.

3. Another idea that we are exploring is to allow the client to purchase a long term health care policy from the trust that she created in the previous example. The client could then apply for one of the better long term care contracts. Upon acceptance and receiving a firm offer from a well-established carrier, the client can enter into an equivalent contract with the trust, under which the trust actually serves as the insurance carrier and takes the risk of paying for her home health care, if and whenever needed, and the client pays a premium slightly more than what the carrier would have charged. The premium would not be considered a taxable gift because it would be an arm’s length purchase, and we do not believe that the client could be considered to have retained “the fruit of the tree” under Internal Revenue Code Section 2036(a) because of the arm’s length nature of the contract.

And, if the client is well below the threshold for reporting on death, the IRS would not be likely to review this.

It may be best to wait until after the federal gift tax return is filed in 2013 if the preparer of the return believes that 2013 transactions or sales between the grantor and the trust that are completed before the gift tax return is filed must be reported. One Heckerling speaker believes that the Form 709 instructions require disclosure of any transaction between the grantor and the trust, including checking the boxes for discounts.

For example, if a client put cash into an irrevocable trust in 2012 and then sells the trust a discounted limited partnership interest in January 2013, does the “took a discount” box on the gift tax return have to be checked? One speaker estimated that there will be 500,000 or more gift tax returns filed in 2012, which would twice the amount returns filed in 2011.

The sooner the return is filed, the sooner the three-year statute of limitations will run. It seems better to file the returns on April 15 or shortly thereafter, as opposed to later in the year under the extension rules, because the IRS may be more likely to allow the early filed returns to pass without being pulled for audit or review.

It should go without saying that the lawyer who prepared the gifting documentation and trust should prepare, or at least carefully review, the gift tax return because of the high rate of errors made by return preparers who do not have a legal and substantive tax law background. Many mistakes will be made in gift tax return filing, and oftentimes knowing what to put in the return is an art rather than a science.

Kenneth J. Crotty, J.D., L.L.M., of our firm will be hosting two complimentary webinars for our readers later this month. One is entitled “Avoiding Disaster on Highway 709,” which will discuss how to avoid disastrous errors on gift tax returns.

The other is “Splitting Hairs over Splitting Gifts – 8 Common Errors That Gift Tax Return Preparers Need to Know.” Anyone filing a Form 709 with a split gift, whereby one spouse’s exemption is used on another spouse’s 2012 gift, should see this webinar, which includes materials that have been published with Bloomberg BNA and updates from comments made at Heckerling 2013.

4. We also believe that many married couples will gravitate toward having joint revocable trusts as opposed to separate revocable trusts, for the reasons described in the Re-Tooling article below.

We welcome questions, comments, and suggestions with respect to joint revocable trusts, but please keep in mind that this can be VERY COMPLICATED STUFF and that funding a joint revocable trust could be a taxable gift by one or both spouses to the other spouse that will not qualify for the marital deduction unless it is set up properly.

Alan discussed this at length with Howard Zaritsky during a break between sessions, and they will be working together to create useful materials for practitioners regarding this issue. A joint revocable trust could be the best vehicle to facilitate receiving a full stepped up basis in all non-pension assets owned by a married couple, as described below.

5. Portability is now permanent, and the IRS regulations ease up on the amount of disclosure and the valuation due diligence that has to be done when an estate is under the $5,250,000 but files a Form 706 to give the surviving spouse the unused portion of the first dying spouse’s credit exemption.

If one spouse dies with a $2,250,000 estate, and the surviving spouse then has an $8,250,000 exemption allowance, the surviving spouse can make a gift of $3,000,000 before remarrying or after remarrying and before the next spouse dies. Otherwise, when the next spouse dies, the now twice-survived spouse’s $3,000,000 “ported” exemption would be reduced to whatever is “ported” from the second dying spouse and can never exceed what the second dying spouse leaves.

So the order of relationships becomes “remarry, kill your spouse, gift to children – and then repeat by remarrying again, killing your next spouse, and gifting to children.” Maybe this will become a Nicholas Cage movie.

Keep in mind the investment calculations discussed above. The exemption ported to a surviving spouse will not grow with inflation! A $5,250,000 investment in an S&P Fund for 30 years beginning 1981 is worth $69,044,326 in 2011. It is much better to have $5,250,000 in a credit shelter trust on the first death than relying on portability.

Our portability poems can be reviewed here.

6. Individuals who have not used their 2012 ability to transfer up to $100,000 from an IRA to a charity will have until February 1, 2013 to accomplish this, and it won’t be included in their 2012 income. During the remainder of the 2013 year, individuals can also transfer up to $100,000 from an IRA to a charity and exclude that amount from 2013 income.

7. New Terminology – If a trust established by one spouse for the benefit of the other is called a SLAT (Spousal Lifetime Asset Trust), what would you call such a trust that pays an annual unitrust amount to the surviving spouse? Professor Sam Donaldson, who we were pleased to hear has moved to Georgia and now teaches at Georgia State University, called this a SLUT.

8. One speaker speculated that a compromise on discounts would be to allow a marketability or lack of control discount, but not both of them. The speakers also feel that there is a continuing possibility that defective grantor trusts (trusts that are disregarded for federal income tax purposes) will be disallowed, but hopefully trusts formed before a proposed Bill potentially comes out of the House Ways and Means Committee will be grandfathered in. If clients are going to be making discounted gifts or sales to an irrevocable trust, get these done sooner rather than later this year!

9. Clients who may be subject to estate or inheritance taxes from other states should be relieved that they can move to Florida and escape some pretty horrendous estate taxes. Connecticut is the only state with a gift tax. Six states have exemptions of only $1,000,000 (Maryland, Massachusetts, Minnesota, Oregon, New York, and D.C.). Only seven states have an inheritance tax. The highest estate and inheritance tax states are New Jersey and Maryland.

10. We may also see GRATs limited to a 10-year required term and a 10% required gift element, which will make them much less attractive than what most of us are using now. Our GRATs Are Great materials are available upon request, and include spreadsheets that you can adapt to your own client situations.

11. There was much discussion of the Wandry case, which was a Tax Court Memorandum decision indicating that a formula clause conveying a percentage of ownership of the entity equal in value to X dollars is protected from gift tax exposure upon audit if the IRS determines that the per percentage value of human interests is greater than what the taxpayer used in determining the amount of units actually issued as the result of the assignment document.

We prefer to use this technique in situations where the amount of discount or underlying asset value could be subject to dispute with the IRS, but Ronald Aucutt (one of our heroes) feels that this planning technique will be litigated in the future and that there is much less than 100% of chance of taxpayer success.

The speakers we’ve heard thus far at Heckerling are much more comfortable with the McCord and Pedder case results, where a charity receives a portion of a gift transfer and any excess value based upon a valuation formula, but this is a much more cumbersome and expensive process than a simple “Wandry clause.”

12. Steve Akers has excellent materials and made a wonderful presentation on planning with interest rates and interest vehicles. There is nothing to prevent allowing someone who has made a $5,000,000 gift in 2012 to loan money to the trust at an interest rate commensurate with what a banking institution would charge. This could be substantially more than the federal rate.

13. In addition, there will still be a need for grantor trusts that toggle off grantor trust status to facilitate having trust income taxable to beneficiaries who receive it. We believe that many clients will be interested in having defective grantor trusts reformed or otherwise segregated into two separate trusts, one of which can remain a grantor trust, and the other of which can be “toggled off.”

A great many families have defective grantor trusts and no longer have significant estate tax concerns, or would simply prefer to save income tax because of the new 39.6% top rate.

14. Clients that have non-voting or minority interests in LLCs, limited partnerships, and other entities, but do not have taxable estates, may now benefit from having voting or general partnership control over the entity in order to allow them to take a full step up in income tax basis as opposed to a discounted partial step up. Many regular corporations will be converted to LLCs or limited partnerships to give the client voting control while maintaining charging order protection by keeping other members in the entity. Charging order status planning will be more important where clients own controlling interests in entities.

Where the client is a minority or nonvoting member or limited partner under circumstances where other arms length owners will not give up voting control, it should be possible to give the client a put right to receive assets worth the pro rata value of underlying entity assets to avoid having a discount on death; however, this should be drafted carefully so as not to be exercisable by a future creditor to compromise charging order protection.

15. Asset protection trusts will be more often funded as complete gifts, with the grantors being discretionary beneficiaries. The complete gift aspect gives these trusts a good business reason to exist, and we often provide that the grantor cannot be included as a beneficiary unless or until his or her net worth drops below a stated value that is below what the grantor has retained outside of the trust.

16. The recent Estate of Kelly case was also a taxpayer success, and the Court specifically found that a management fee paid to a general partner company owned by an individual with Alzheimer’s Disease was not a 2036(a) retained life interest. A copy of this case can be reviewed by clicking here.

We still encourage clients not to receive management fees from limited partnerships.

17. Stepped up basis is going to be more important than ever with a 20% or 23.8% effective capital gains rate to be paid by many descendants or spouses who sell inherited assets after the death of a loved one.

The IRC Section 1014 one-year rule generally provides that if you give something to somebody who dies within one year and inherit it back, there is no stepped up basis. What if you give your spouse a valuable low basis asset and his or her trust indicates that you will inherit it back, but if you disclaim, it will go into a special trust to be held for your health, education and maintenance? Upon issuing the disclaimer, the devise back to you is not considered to have occurred, and a stepped up basis may be claimed on the asset that ends up in the irrevocable trust.

18. Finally, there was of course discussion on how to “get out of a trust” that a client set up at year end, but no one had an ideal solution. If the client signed the documents and intended to make the gift, would it be possible for the trustee of the trust to disclaim it? Because of the fiduciary duties that the trustee has to beneficiaries, this would be a hard sell, and no one should risk their professional license by encouraging this type of conduct if there is no reasonable chance of prevailing. On the other hand, some clients will decant trusts into new trusts that allow for discretionary distributions to children, and then if the children receive large discretionary distributions and choose to gift these back to the grantor, who can stop this? And will grandchildren complain about it later? Why not reform or decant the trust now and then wait until there is the consent of one or more adult grandchildren who provide virtual representation of minor and future born grandchildren?

It is anyone and everyone’s guess as to what future estate and gift tax related changes may be in store for us during the continuing fiscal cliff negotiations.

We have much more to report but the above are items of discussion.

Re-tooling Estate Plans after January 1, 2013

Introduction:

The estate planning community will be changing its approach to estate planning for moderately wealthy married couples as the result of having the first permanent and stable estate tax law since 2001.

A good many successful and affluent individuals are well below the $5,250,000 exemption, so asset preservation, creditor protection, income tax planning, and surviving spouse and descendant protection becomes paramount.

While it might be assumed that a married couple having only $4,000,000 – $7,000,000 in assets would not become subject to federal estate tax under the new system, planners should keep in mind that assets can grow much faster than the Consumer Price Index standard that applies under estate tax law. For example, $5,250,000 invested in an S&P 500 index fund in 1981 would be worth $69,044,326 at the end of 2011. In contrast, an investment of $5,250,000 during the same time frame that performed at the same rate as the Consumer Price Index would only be worth $12,594,530 at the end of 2011. The above numbers do not take into account tax and investment costs that would have to be paid by a taxpayer, but some portfolios perform better than the S&P 500 Index.

If a husband and wife with an estate valued at $5,250,000 today (half of 2013’s combined exemption amount) invest in a vehicle that performs at the same rate as the S&P 500 from 1981-2011 and then die thirty years from today and do not employ some sort of estate planning, they would have an estate subject to almost five and a half times the estate tax exemption amount – all without having to add a single dollar from savings!

Many estate tax lawyers have become accustomed to creating separate revocable trusts for each spouse. This structure allows the first dying spouse to leave assets under a bypass trust that will protect the surviving spouse from creditors, estate tax, potential undue influence, and future spouses.

If this strategy is merited for the reasons described below, why not have more than just the assets owned by one spouse be held under such a trust after the first death?

The great majority of financially successful individuals will probably want to think through what portion of trust assets should be held in a protective trust, and what portion should be owned individually by a surviving spouse.

Additionally, many clients will also question whether it is unduly inconvenient or even harmful to have separate revocable trusts, each owning separate assets. Such an arrangement may make assets subject to the creditor claims of each spouse, while joint ownership as tenants by the entireties would not, thus providing much better creditor protection.

We can best address these questions, as well as income tax planning, by a discussion of the primary arrangements that are available, including the advantages and disadvantages of each, which are depicted in the attached charts.

The factors we evaluate for each scenario are as follows:

1. Estate tax considerations, in case the exemption goes down in the future or the family’s investments and savings increase dramatically.

2. Income tax planning, including consideration of the stepped-up basis rules in the face of a possible 23.8% effective capital gains rate, which may rise in the future, and deferral of withdrawals from IRAs and retirement plans that are inherited.

3. Creditor protection planning, which can be broken into five distinct goals:

(a) The protection of assets during the joint lifetime of the spouses.

(b) The protection of assets held under trusts established as the result of the first death.

(c) The protection of assets of the surviving spouse, which is much more challenging.

(d) Protection of the surviving spouse and descendants from possible future spouses or significant others–the Hooters girl or the pool guy!

(e) Protection from undue influence from sons and daughters in law, children, and others who might become more aggressive as clients get older and infirm.

Scenario #1- Keep It Simple But That May Be Stupid (KISS)- Joint Ownership with Right of Survivorship and the “I Love You” Will.

A husband and wife can own assets jointly as tenants by the entireties, so that the surviving spouse is the sole owner immediately upon the first dying spouse’s death.

IRA and pension accounts can be made payable to the surviving spouse, who can then roll these into his or her own IRA and defer taking lifetime withdrawals until after the surviving spouse reaches age 70 ½.

Under this scenario, the assets will be protected from a creditor who has a judgment against only one spouse so long as: (1) both spouses are alive; (2) both spouses reside in Florida (or one spouse resides in another tenancy by the entireties state); and (3) the spouses do not divorce. That is a lot of “what ifs”!

Creditor protection is nearly non-existent for the surviving spouse, however. Although the standard Florida creditor exemptions will be available (for example, IRA rollover assets, homestead property, annuities, and life insurance policies on the life of the surviving spouse), any property not falling under one of these creditor exemptions may be available to a creditor or at best held under entities designed to provide charging order protection and/or asset protection trust arrangements.

Future spouse and descendant protection, such as from undue influence by a new spouse with bad intentions or bad judgment or a meddlesome son-in-law or daughter-in-law, is almost completely non-existent under this estate structure. This lack of protection also extends to any future estate tax or inheritance tax regimes.

Clients should understand that the “next generation” may not see an inheritance as a result of the above. Experienced estate planners know that this is not an exaggeration!

For income tax planning, with respect to assets outside of IRA and pension accounts and life insurance and annuity arrangements, there will be a half basis step-up, which will impact future planning based upon the type of asset involved. Where the step-up involves a single asset held jointly by husband and wife, such as a piece of real estate or collectible artwork or jewelry, the cost basis of the asset after the first death will at best be based upon half of the original cost basis, plus half of the fair market value of the asset on the first dying spouse’s date of death. This will ameliorate, but not completely eliminate, capital gains on appreciation taking place up through the first dying spouse’s death, when recognized if and when the surviving spouse sells such assets. Unfortunately, the Tax Code and Treasury Regulations do not offer a way to sell the stepped-up half of the asset without capital gains, such as if a child wanted to purchase half of an asset.

For publicly traded stocks or private company or partnership interests held jointly but not as husband and wife, shares or specific percentages of ownership can be set aside and identified to receive the full step-up in basis. For a husband and wife, however, the qualified joint interest rules require that ½ of the property get a step up in basis to fair market value, no matter how much each person contributed.

It is noteworthy that spouses having short life expectancies may appropriately become the 100% owners of low basis assets, but the one-year rule under Internal Revenue Code Section 1014(e) continues to apply. The one-year rule provides that if a person transfers assets to someone less than one year before the transferee dies, then the stepped-up basis will not be permitted if the transferee leaves the asset to the transferor, or possibly to a trust for the transferor. We almost always have spouses leave assets into a bypass trust for the surviving spouse to avoid losing the stepped up basis for assets transferred to the first dying spouse within one year of death. If the preference is to have an outright devise, then the best arrangement may be to have the assets payable outright to the surviving spouse, but with the alternate beneficiary being a bypass trust for the spouse. As discussed below, however, a spouse who disclaims assets that pass into a bypass trust cannot hold a power of appointment to redirect the assets later. But the surviving spouse cannot hold a power of appointment over the bypass trust if it has been disclaimed into the trust by such spouse.

A good many affluent taxpayers have established family limited partnerships, family LLCs, and similar vehicles that will be valued based upon a discount upon death. This structuring technique worked well when estate tax was a significant issue; however, it may now be best to rearrange the ownership of such entities to reduce the discount phenomenon so that the fair market value of the ownership interest will not be reduced for income tax basis step-up purposes.

In many cases, the spouse having the shorter life expectancy should therefore own majority voting rights. In the alternative, entity documents might be changed to provide that any solvent member can cause the entity to liquidate or buy the member out for a payment equal to that member’s percentage of ownership multiplied by the net value of all entity assets to eliminate the discount phenomenon.

Scenario #2 – How About a Tenancy by the Entireties Revocable Trust?

If a married couple wants to be sure that they can avoid probate and help avoid confusion over whether bank and brokerage accounts and investments are properly titled as tenants by the entireties, they may wish to form a joint revocable trust under a trust agreement drafted to be considered a tenancy by the entireties asset. Such a trust can provide by its terms that the beneficial ownership interest of the spouses constitutes tenancy by the entireties property, and, through careful drafting, the unities required to create tenancy by the entireties property can be encompassed into the trust. Some couples may prefer this type of trust because it avoids confusion about “whose trust should own what” and creates centralized ownership of assets.

It may also be possible for such a trust to provide that a surviving spouse could disclaim a portion of the trust ownership into a bypass trust as described in Scenario #3 below.

Estate tax lawyers have typically been very reluctant to use joint revocable trusts, in large part because there has been so much confusion over the years as to their proper use. The law of community property states, such as California and Texas, allows for a bypass trust to be funded from joint assets or a joint revocable trust. In non-community property states, such as Florida, where a surviving spouse is considered to have been the owner of half of the trust assets, the amount set aside into a bypass trust that benefits the surviving spouse will be considered as having been contributed by him or her, and thus subject to federal estate tax in his or her estate pursuant to Internal Revenue Code Section 2036(a)(1). The language of Section 2036(a) is as follows:

(1) the possession or enjoyment of, or the right to the income from, the property, or

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

Lawyers who are not aware of these issues have used joint trusts from form books developed for community property states and have caused financial hardship for taxpayers by only having one-half (½) of the joint trust assets that fund the bypass trust escape estate tax on the second death because of Section 2036(a)(1) rule described above. This issue can be resolved by using the FSU-Joint Trust described under Scenario #5 below. Nevertheless, joint trusts can be properly used with appropriate, careful drafting, and will no doubt become more prevalent for the reasons described in this article.

Scenario #3 – Own Assets Jointly But Have a “Standby Disclaimer Bypass Trust System” in Place.

The Florida Statutes and the Internal Revenue Code, working together, provide that a surviving spouse can disclaim half (or in some cases more) of assets that were held jointly between a married couple, even if such assets were held by the spouses as tenants by the entireties.

In order to do this, the surviving spouse must execute and file an appropriate disclaimer, thus causing the assets or interest disclaimed to go through probate under the estate of the first dying spouse. In order to use this option, the surviving spouse cannot exercise any right or receive any benefit from the joint asset to be disclaimed.

Typically, the will provides for a bypass trust to be established, or a “pour-over will” directs the estate assets to the revocable trust of the first dying spouse, which then becomes irrevocable and facilitates the funding of a bypass trust and possibly a marital deduction QTIP trust if the assets passing in this manner exceed the $5,250,000 exemption allowance.

There is also a big disadvantage to a disclaimer-funded bypass trust: The spouse who disclaims into the trust cannot retain or be given any power to appoint how the trust assets will pass on his or her subsequent death. Most clients prefer to have the ability to alter what children and grandchildren inherit and how they will inherit. Trust Protectors may be used to help ameliorate this issue.

Lawyers drafting credit shelter trusts that might be funded by a disclaimer can consider adding Trust Protectors provisions. Such provisions could allow advisors or non-beneficiary trusted friends or family members to change dispositive provisions of the trust agreement as circumstances may change for beneficiaries or if there are any changes under Florida and Federal tax law that could impact an inheritance.

As with the first scenario, jointly held assets will receive a “half step-up in basis” on the first death.

Scenario #4 – Keeping Things Pretty Much the Way They Are.

Many affluent taxpayers in non-community property states have separate revocable trusts for each spouse and separate assets or ownership or life insurance held under or payable to these trusts for estate tax planning purposes.

Spouses with shorter life expectancies can hold lower tax basis assets in their revocable trusts or individually. Creditor protected assets, such as the cash value of life insurance, annuity contracts, and homestead, might be owned individually to help ensure that Florida Statute Section 222 protection will apply, since the statute does not refer to revocable trusts and may not protect assets owned by revocable trusts. Nevertheless, life insurance and annuities may be payable to such trusts. If the trust specifically provides that assets that “pour or pay” into the trust on death cannot be used to pay individual or estate expenses or liabilities, these assets and values will be insulated from creditors that exist after death, just as life insurance and annuity benefits payable to “testamentary” trusts established under a will are insulated pursuant to Florida Statutes Section 222.14.

Since joint assets might still exist and be disclaimed, revocable trust agreements should provide for separate bypass trusts to be funded by disclaimer. This type of agreement will allow the surviving spouse to retain a power to appoint trust assets, including assets payable to the trust or held under the trust, to common descendants or other permitted individuals or organizations. The separate by-pass trust funded from disclaimed assets could have the same language and management, but no power of appointment provisions.

The ability to veto a beneficiary change could rise to the level of being considered a retained power, considering that Treasury Regulation Section 25.2511-2(b) states that a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves.

The Trust Protector provisions described under Scenario #3 above should also be included for this estate planning structure as well. Typically, we provide that no Trust Protector action can be facilitated without consent of the surviving spouse if he or she is able or willing to give input. If the surviving spouse is unable or not willing to give input, then Trust Protector action requires the consent of at least one trusted child. The ability to consent to a beneficiary change should not rise to the level of being a testamentary power of appointment.

Scenario #5- The Best Arrangement for Many Couples- The Joint Full Step-Up Revocable Trust.

As mentioned in Scenario #1, a married couple may prefer having one joint revocable trust in order to avoid confusion with respect to “whose trust should own what” and to have centralized ownership. Scenario #1 discusses a joint and survivor revocable trust that is simply considered to be owned by the surviving spouse outright on the death of the first spouse.

An alternative, which was blessed in IRS Private Letter Rulings 200210051 and 200101021, as to full funding would be to have a trust, over which both spouses have the power to appoint all trust assets on death. The purpose for this is twofold:

1. All assets under the trust may receive a full step-up in basis instead of only half, pursuant to Internal Revenue Code Section 1014, according to the above IRS decisions.

2. All of the assets could be paid into a bypass trust to be held for the health, education, and maintenance of the surviving spouse without being subject to estate tax on the second death, while also offering the surviving spouse creditor protection and protection from any predatory undue influence.

This type of trust probably cannot constitute tenancy by the entireties property under Florida law, because the unity of survivorship does not exist, but the funding of a credit shelter trust with more than 50% of a couple’s non-IRA, non-pension, and non-life insurance assets can have an extremely good effect for estate tax, inheritance protection, and creditor protection planning in subsequent years, and can certainly therefore be suggested.

For this reason, many separate spouse revocable trust systems will be replaced with single joint revocable trusts in the next few months and years. BUT DON’T TRY THIS AT HOME! THERE ARE MANY COMPLEXITIES THAT COME TO LIGHT WHEN DRAFTING AND IMPLEMENTING THESE TRUSTS, SOME OF WHICH WE ARE NOW STUDYING AND DESIGNING LANGUAGE FOR. WE WILL NOT MENTION ALL OF THESE ISSUES HERE AND WELCOME COMMENTS AND SUGGESTIONS. EVEN THE FUNDING OF THIS TYPE OF TRUST COULD BE CONSIDERED A TAXABLE GIFT IF THE APPROPRIATE LANGUAGE IS NOT USED.

While tenancy by the entireties creditor protection will not be available under the Full Step-Up Joint Trust (FSU-Joint Trust), a good degree of creditor protection can be obtained by having the trust assets held under a limited partnership or limited liability company owned mainly by the FSU-Joint Trust. Further creditor protection can be obtained to a lesser extent by a separate irrevocable trust established by the husband and/or wife and held for descendants, other family members, or charity. This arrangement can allow the clients to set aside a small amount of assets that will not be subject to federal estate tax if and when marital assets ever exceed the exemption amounts, while also providing charging order creditor protection for the assets held under the LLC or limited partnership. Under Florida Statutes Section 608.433, creditors cannot reach into a limited liability company or limited partnership that has multiple members, notwithstanding that the creditor has a judgment against the majority member.

Alternatively, or in addition to the above, the trust could be the beneficiary of an asset protection trust formed by the husband and wife in an asset protection trust jurisdiction such as Delaware, Nevada, Alaska, or Nevis, with provisions that make the FSU-Joint Trust and thus the bypass trust to be established under the joint trust direct beneficiaries of the asset protection trust so that the Grantor does not retain the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves.

Such a Trust will not necessarily be considered as owned by the Grantor for federal estate tax purposes if properly designed and operated according to Private Letter Ruling 200944002. However, by long standing case law, if a Trust is established and the Grantor could receive indirect benefits by reason of having the Trust pay obligations of support or creditors of the Grantor, then the assets of the trust will be included in the Grantor’s gross estate for federal estate tax purposes.

In view of the above, planners should reach out to clients to explain the new law and the advantages and disadvantages of keeping the present system that the client has in place.

Depending upon life expectancy, family security needs, creditor protection needs, and estate and inheritance tax considerations, a good many estate plans will be changed to take the above considerations into account, and many new estate plans will include joint trusts.

All drafting should take into account the appropriate use and allocation of the married couple’s generation skipping tax exemption and should recognize that future generations will face creditor situations, divorces, and federal estate tax at exemption amounts and rates that may be much more devastating than those now in place.

Therefore, even married couples with moderate wealth that have no estate tax challenges of their own should be advised of the advantages of making sure that on the surviving spouse’s death, assets pass into trusts that can benefit the children and grandchildren without being subject to federal estate tax at the children’s levels. These are commonly called “generation skipping trusts,” which make assets exempt from taxation at the death of subsequent generations for up to 360 years under the Florida Rule Against Perpetuities Formula language should be included in all of the will and trust documents referred to in this article to assure that the maximum amount that can be allocated to “generation skipping trusts.” Clients who are skeptical of this advice and prefer outright dispositions will typically permit trust documents to provide that any child could disclaim all or part of his or her inheritance into a trust that the child could serve as Trustee of, and receive amounts as needed for health, education, and maintenance from. Such a trust can serve the same purposes as a directly funded generation skipping trust, except that the child cannot retain a power to appoint how the trust assets pass upon his or her death without having the trust subject to federal estate tax at his or her level.

Trust language can also provide that any beneficiary who is insolvent or in the midst of a divorce, creditor situation, or litigation that could result in a creditor action would have their inheritance transferred to a generation skipping trust, notwithstanding whether they attempted to disclaim or not. The Florida Disclaimer Statute will not apply to treat a beneficiary as having not received a disposition that he or she disclaims if the beneficiary is insolvent at the time that the disclaimer is exercised.

APPLICABLE FEDERAL RATES

To view a chart of this month, last month’s, and the preceding month’s Applicable Federal Rates, because for a sale you can use the lowest of the 3 please click here.

SEMINARS AND WEBINARS

SEMINARS:

DO NOT MISS Representing the Physician in Ft. Lauderdale, Friday January 18, 2013, which will feature extensive information on tax planning for physicians and physician practices under the new law!

FRIDAY, JANUARY 18, 2013 Florida Bar Seminar
Save the date for a three day weekend in Ft. Lauderdale! The Florida Bar Continuing Legal Education Committee, the Health Law Section and the Tax Law Section present Representing the Physician 2013: Practical Considerations for Effectively Guiding Physicians and Their Practices. The seminar will be held at the Sheraton in Ft. Lauderdale, Florida. Speakers include Lester J. Perling, Esq., on the topic of Federal and Florida Health Law: Hypothetical Situations that Are Often Overlooked by Physicians and Alan S. Gassman on the topic of It is Not Just Health and Tax Laws: Charting Florida Waters When Designing Physician and Medical Group Arrangements. Laws you Knew or Wish you Knew.

Don’t miss this incredibly useful live seminar with Jonathan Blockmachr, Samuel A. Donaldson, and many others – if you have never attended an All Children’s Seminar you have never seen the best there is!

WEDNESDAY, FEBRUARY 13, 2013 15th Annual All Children’s Hospital Estate, Tax, Legal and Financial Planning Seminar.
All Children’s Hospital Foundation is hosting the Estate, Tax, Legal and Financial Planning Seminar at the All Children’s Hospital Education Conference Center in St. Petersburg. Programs and presenters include Samuel A. Donaldson on the topic of Federal Tax Update, Jonathan Blattmachr on Myths & Realities of Charitable Trusts and Some Really Cool Generation Skipping Tax Ideas, Investments in Trusts: Charting a Prudent Course by Tami Foley Conetta, and Alan S. Gassman on the topic of Avoiding Disaster in the Sunshine State – Tricks, Traps, and Nuances That Make Florida Planning Interesting and Unique.

UPCOMING (FREE) WEBINARS:

THURSDAY, January 24, 2013, 4:00 – 4:50 p.m.
Please join us for the 444 Show. A monthly CLE webinar for professionals sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman. This month’s topic is Planning Under the 2013 Tax Law – Real Estate, Small Businesses, and Individual Business Personal Planning, Including 3.8 Reasons to Make Real Estate Active with Rick Buschart, Mike O’Leary, and Alan Gassman.

MONDAY, FEBRUARY 4, 2012, 12:30 -1:00 p.m.
Please join us for Lunch Talk, a free monthly webinar series sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman. This month’s topic is the second part of the two part series with Shannon Waller on Accelerating Law Office Teamwork with Interesting Tools You Can Use Immediately. To register for the webinar please visit www.clearwaterbar.org

Christopher Denicolo, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. He has co-authored several handbooks that have been featured in Bloomberg BNA Tax & Accounting, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters and the Florida Bar Journal. is also the author of the Federal Income Taxation of the Business Entity Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition Mr. Denicolo received his B.A. and B.S. degrees from Florida State University, his J.D. from Stetson University College of Law and his LL.M. (Estate Planning) from the University of Miami. His email address is Christopher@gassmanpa.com.

Kenneth J. Crotty, J.D., LL.M., is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. Mr. Crotty has co-authored several handbooks that have been published in BNA Tax & Accounting, Estate Planning, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, Estate Planning magazine, and Practial Tax Strategies. Mr. Crotty is also the author of the Limited Liability Company Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. He, Alan Gassman and Christopher Denicolo are the co-authors of the BNA book Estate Tax Planning in 2011 & 2012. His email address is Ken@gassmanpa.com.

Thank you to our law clerks that assisted us in preparing this report:

Kacie Hohnadell is a third-year law student at Stetson University College of Law and is considering pursuing an LL.M. in taxation upon graduation. Kacie is also the Executive Editor of Stetson Law Review and is actively involved in Stetson’s chapter of the Student Animal Legal Defense Fund. In 2010, she received her B.A. from the University of Central Florida in Advertising and Public Relations with a minor in Marketing, and moved to St. Petersburg shortly after graduation to pursue her Juris Doctor. Her email address is Kacie@gassmanpa.com.

Alexandra Fugate earned her B.A. in English from the University of Florida in 2008, and J.D. from Stetson University College of Law in 2012. She has been a Guardian ad Litem for the past two years, a judicial intern for the Twelfth Circuit in Bradenton, and was recently admitted to the Florida Bar. She wants to pursue a career in business, employment, and labor law. Her email is Alexandra@gassmanpa.com .

Eric Moody is a third-year law student, scheduled to graduate in December 2012, at Stetson University College of Law and is considering pursuing an LLM in estate planning upon graduation. Eric is also an Articles and Symposia Editor for Stetson Law Review. In 2009, Eric received a B.S. in Business Management from the University of South Florida. Eric’s email address is Eric@gassmanpa.com.