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

Several of my clients established Asset Protection Trusts ("APTs") in July of 2007. That is the  month when they first became legal in Tennessee. Unfortunately, one of my first clients to establish a Tennessee APT died recently. She never experienced creditor problems and never needed the asset protection benefits afforded by the trust.

When she became very ill earlier this year, she transferred her remaining assets to the APT. She also exercised her testamentary limited power of appointment over the APT to make some specific bequests to friends and to take advantage of the absence of federal estate taxes in 2010. The document for making this exercise was analogous to an amendment to a revocable trust.

During the last few weeks of her life, the Trustee managed the trust assets for her benefit. Upon her death, the APT became a Will substitute. My client had a “pourover” will, but it will not be needed. Currently, the Trustee is administering the APT in the same manner that a revocable trust would be administered.

If you are going to employ a funded revocable trust as part of your estate plan, you should consider utilizing an APT. An APT gives you the same benefits as a revocable trust and provides asset protection during your lifetime.

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After reading the previous article regarding accelerating income to 2010, one of my clients called me to discuss a large charitable gift that he is planning to make in December of 2010. He wanted to confirm that postponing deductions until 2011 is a good idea.

As a general rule, it will be advisable to postpone the payment of deductible expenses and charitable contributions until 2011 if tax rates are higher in 2011. However, there are additional considerations with deductions. The Internal Revenue Code limits deductions in various ways.

For example, you can only deduct charitable contributions up to a certain percentage of your income for the year. If you accelerate a lot of income to 2010 and postpone your charitable gifts until 2011, you may find that you will not be able to deduct the entire amount of the contribution in 2011. You are allowed to carry over any excess charitable contribution deductions for five years. However, the farther away in time that you benefit from the deduction, the less utility it has on a present value basis.

I recommended that my client ask his CPA to run some pro forma calculations in order to understand the tax ramifications of postponing his charitable contribution until January of 2011. Most CPAs have software that can calculate estimated taxes based upon the scheduled law for 2011.

Postponing deductions until 2011 might be a good strategy. However, you should confirm it with your CPA prior to making this decision.

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A number of my clients are considering various transactions that will accelerate income from later years into 2010. The transactions include selling a business, declaring dividends from a closely held business, selling appreciated assets such as marketable securities or real estate, or converting an IRA to a Roth IRA.

One client is guaranteeing a $10 million bank loan to a company that owes her $10 million from purchasing her business 3 years ago. The company will use the loan to prepay the remaining balance of the note so that my client can pay a 15% capital gains tax rather than the scheduled 20% rate for 2011 and 2012, and the 23.8% rate for payments made in 2013 and future years.

The reason for accelerating income to 2010 is because the Bush-era tax cuts are scheduled to expire at the end of 2010. If the tax cuts fully expire, the change in income tax rates from 2010 to 2011 will represent the largest income tax increase in the history of our country.

Congress may not allow the tax cuts to fully expire. There is a “Democratic Plan,” which has been endorsed by the President, that will only allow the tax cuts to expire for taxpayers making more than $250,000 per year. The Democratic Plan would retain 2010 tax rates for taxpayers making less than $250,000 per year.

The “Republican Plan” would permanently extend all of the Bush-era tax cuts.

This matter will be considered by Congress after the November elections. It is possible that there will be a compromise. It is also possible that there will be gridlock and nothing will be done, similar to what happened at the end of 2009 with respect to estate taxes.

The attached article written by Mark Robyn and published by The Tax Foundation shows the increase in taxes for several different groups of taxpayers under possible alternative plans. Due to the potential for higher tax rates beginning next year, you should seriously consider accelerating income to 2010.
 

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The American Family Business Institute has published a death tax voter guide for the 2010 elections. The voter guide identifies which candidates have signed a pledge to repeal death taxes as well as how incumbents have voted on various bills to permanently repeal death taxes.

I doubt that death taxes will be totally repealed. Nevertheless, those who have signed the pledge will presumably be more inclined to vote for estate tax relief in the form of higher exemptions and lower tax rates.

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I occasionally update estate planning documents for clients who move to Tennessee from a community property state. There are 9 community property states, including Texas, California, Arizona, Washington, Idaho, Louisiana, Nevada, New Mexico, and Wisconsin. The other 41 states are known as common law states.

I am currently updating estate planning documents for clients who recently moved from Arizona to Tennessee. As is so often the case with clients in community property states, these clients utilized a joint revocable trust as a centerpiece of their estate plan. I am amending their joint revocable trust so that it qualifies as a Tennessee Community Property Trust.

The assets that were in the trust at the time of the move were already community property. The amendment was not needed to qualify the prior assets as community property. However, additional assets that my clients acquire would not otherwise qualify as community property. By qualifying the trust as a Tennessee Community Property Trust, the additional assets will also qualify for community property benefits.

When clients do not already have a joint revocable trust at the time of their move, they have 2 choices for preserving the community property status of their assets acquired while married in the community property state. They can either create a Tennessee Community Property Trust and transfer the assets to the trust or they can sign a Community Property Agreement which documents the community property assets at the time of the move. The trust has the advantage of creating community property status for later acquired assets.

Community property is a valuable benefit that should be maintained when moving to a common law state. A Tennessee Community Property Trust is the preferred method for preserving this benefit.
 

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One of my clients called me today with a complaint about his Tennessee Class B Gift Tax. In 2009, he made a gift of $13,000 to his step-granddaughter. She had a tough year, including losing her job and getting divorced. $13,000 is the amount of the annual exclusion for federal gift tax purposes and Tennessee gift tax purposes for certain donees.

As a general rule, gifts that do not exceed the annual exclusion are exempt from gift tax. The problem is that Tennessee categorizes some donees as “Class B” beneficiaries. Class B beneficiaries consist of step-grandchildren, sisters-in-law, brothers-in-law, nieces, nephews, as well as persons who are not related to you.  Tennessee only allows you to make an annual exclusion gift of $3,000 per Class B beneficiary or $5,000 if you only make a gift to one Class B beneficiary.

Because my client’s step-granddaughter was the only Class B beneficiary to whom he made a gift, he owed tax of 6.5% times $8,000, or $520. My client was chapped because he was being “punished” for being generous to his step-granddaughter. In 2010, his gift to his step-granddaughter will only be $5,000.

Most people characterize the Class B gift tax as a silly tax. I suspect that it brings in less than $50,000 per year to the State. There have been numerous proposals to abolish the Class B distinction so that tax-free gifts of $13,000 can be made to anyone. Every time that a proposal is made, a fiscal note is attached to the bill and it never goes anywhere due to the fiscal note.

If you are making gifts to collateral relatives, you should consider limiting the gift to $3,000 per donee, or $5,000 if you are only making gifts to one Class B donee during the year if you want to avoid the Class B gift tax.

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The enclosed article written by Mark Maremont and Leslie Scism in the Wall Street Journal states that an increasing portion of large insurance policies sold to affluent individuals are used to help their families with the payment of estate taxes. I often recommend that my clients use life insurance as part of their plan for combating estate taxes. Life insurance should be combined with a gifting strategy that will reduce the ultimate estate tax liability.

Life insurance enjoys numerous tax benefits. First, the “inside” buildup of cash value in the policy is not subject to income taxes. Second, the receipt of death proceeds is not subject to income taxes. Finally, the proceeds can be exempt from estate taxes if the ownership is properly structured. The most common structure for protecting the proceeds from estate taxes is to have the policy acquired and owned by an irrevocable life insurance trust.

The article raises the concern that Congress might choose to curtail the tax benefits of life insurance as a way to raise revenue. As the purpose of life insurance shifts from providing a safety net for the insured’s family to providing money to pay estate taxes, the justification for providing the tax benefits seems less compelling. The insurance industry has clout in Washington. I am predicting that there will be no significant reduction in the tax benefits of life insurance within the next few years.
 

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