Tennessee Estate Planning Law : Tennessee Estate Planning Lawyer & Attorney : Bryan Howard : Howard & Mobley Law Firm : Nashville, Chattanooga, Memphis

Hawaii has become the 13th state to allow an individual to set up a trust for his or her benefit which is protected from the individual’s creditors. Unlike Tennessee, Hawaii’s law has limits on how much you can transfer to the trust and what kind of assets you can place in the trust. In addition to these restrictions, anyone who establishes such a trust must pay a tax to the state equal to 1% of the assets transferred to the trust. Hawaii is the only state that charges a tax to establish such a trust.

Because of this tax, it is unlikely that anyone other than a resident of Hawaii would use a Hawaii trust rather than a trust in one of the other 12 states. Tennessee’s asset protection trust law compares very favorably to the other asset protection trust states. The Tennessee legislature made several improvements to our law this spring in order to keep our law at the forefront. Tennessee is still the only Southeastern state that permits self-settled asset protection trusts. See the enclosed map for the other states.
 

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 In less than 6 months, federal estate taxes are scheduled to return with an exemption of $1 million and a maximum rate of 55%. Numerous bills have been submitted to provide relief from these taxes. Most of the bills would increase the exemption to $3.5 million or more and decrease the top rate to 45% or less.

These bills have not passed because they would significantly decrease tax revenues. The latest such failure was an amendment offered to a Jobs Bill by Senators Jon Kyl of Arizona and Blanche Lincoln of Arkansas. Apparently the Senate decided against combining a large tax decrease with a bill that proposes to increase spending by $33.9 billion.

A lot of Senators are hesitant to pass another large spending bill. Many of these same Senators believe that taxes, including estate taxes, should be reduced. In the enclosed LA Times article, Tennessee’s Lamar Alexander explained why it is logical to support decreasing taxes while at the same time fighting increasing spending as follows: “If you’re going to spend more, you have to have a revenue source or you run up the debt.” Reducing taxes "reduces the amount of revenue we have to spend, and we should reduce spending by the same amount.”

What Lamar says by implication is that the national debt will increase if you reduce taxes without reducing spending. There appears to be a lot of support for reducing taxes. There does not appear to be a lot of support for spending less. It will be very difficult to solve the estate tax dilemna if the fix requires a commitment to decrease spending. I am counseling my clients to be prepared for the return of federal estate taxes in 2011 with the $1 million exemption and 55% top rate.

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 It is very typical for a Will to direct the Executor to pay the Decedent’s valid debts. When my clients own real estate encumbered by a mortgage, they often want the successor owner of the real estate to continue paying the mortgage. For these clients, I place a provision in their Wills giving the Executor the discretion to continue paying the mortgage until the successor owner takes over the payments.

When the successor owner of the real estate is also the residuary beneficiary of your estate, it may not matter whether your estate or the successor owner pays the mortgage. If your estate pays the mortgage, the residuary estate passing to the successor owner will be less. Nevertheless, it provides more flexibility for the successor owner if you allow the mortgage to remain in place. The successor beneficiary can pay off the mortgage early if there is not a need to maintain the mortgage.

Things are not as easy when the successor owner of the real estate is not the residuary beneficiary of your estate. Now it makes a big difference as to whether your estate or the successor owner pays the mortgage.

If you decide that you want the successor owner to pay the mortgage, there is another consideration. The bank may file a claim against your estate and require the Executor to pay the mortgage. Depending upon whether the successor owner was jointly liable on the debt, your estate may have a claim against the successor owner to pay at least a portion of the debt. If you do not want your Executor to be in the position of having to sue the successor owner of the house, you should condition any bequest to the successor owner on their agreement to assume the mortgage. If you take this approach, the bequest to the successor owner will be reduced to the extent, if any, that your estate is required to make payments on the mortgage.

There are 2 methods by which the successor owner can acquire the property.

First, when you own the property, your Will simply devises the property to the successor owner. You can make the devise conditional on the devisee’s assumption of the mortgage.

Alternatively, when you own the property as tenants by the entirety with your spouse or jointly with right of survivorship, the successor owner will acquire the property by operation of law. Your Will cannot require the successor owner to assume the mortgage. However, if your Will makes a bequest of other assets to the successor owner, this bequest can be conditioned upon the successor owner’s assumption of the mortgage. If the bequest is less valuable than the mortgage, the successor owner might forfeit the bequest rather than assume the mortgage.

In summary, you need to decide who you want to pay your mortgage and draft your Will accordingly.

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One of my clients has been diagnosed with a rare disease that will very likely end her life in 2010. Due to the peculiar estate tax laws that apply to decedents dying in 2010, there are some unusual planning steps that my client and her husband are taking.

As a general rule, you want to make sure that the first spouse to die has sufficient assets titled in their name so that they can take maximum advantage of federal and Tennessee estate and inheritance tax exemptions. In 2009, the magic number was $3,500,000. This year, the amount is unlimited.

We previously split assets between the husband and the wife with each of them owning assets worth approximately $6 million. The husband is in the process of transferring most of his assets to his wife.

Another change that we are making is to create a revocable trust for the wife that will replace her will. The wife’s revocable trust will own her assets so that it will be unnecessary to probate her will. The revocable trust will transfer $1 million to a typical credit shelter trust of which the husband and children are beneficiaries. The remaining $11 million of assets will be transferred to a marital trust for the husband’s sole benefit during his lifetime. Assuming the wife dies when there is no federal estate tax, it will not be necessary to claim a marital deduction for the marital trust for federal estate tax purposes. We will elect to qualify for the marital deduction for Tennessee inheritance tax purposes so that no Tennessee taxes will be owed.

The overall result of this plan is that all of the couple's assets are eligible for a basis step up. Since the combined built-in appreciation of their assets is $4 million and there is $4.3 million of basis step up available, they will receive a full basis increase. Since they own some significant rental properties, the higher basis will increase the husband’s depreciation deductions.

More importantly, the $11 million marital trust will not be subject to federal estate taxes upon the husband’s subsequent death. This will be a tremendous advantage to the family if they do not ever have to worry about paying federal estate taxes.

In summary, simple planning steps are needed to take full advantage of the absence of federal estate taxes in 2010.
 

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