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

As my clients age, I am more likely to encourage them to establish a revocable trust. There are several reasons for this preference.

First, if my clients become incapacitated, it is easier for the successor trustee to manage my client’s assets in their capacity as Trustee. Experience has shown that financial institutions are more suspicious of powers of attorney than revocable trusts. Second, if my client is successful in changing the title of all of his/her assets to the Trust, probate can be avoided in Tennessee.

Third, if my client owns property in another state, probate can be avoided in the other state. Fourth, my elderly clients are less likely to acquire additional assets during their remaining lifetimes. Thus, it is more likely that they will be able to keep all of their assets titled in the name of their trust. Finally, my elderly clients have a keener appreciation of the privacy afforded by a revocable trust.

I am currently establishing revocable trusts for two of my clients who are approaching their 80th birthdays. During the last few years, the husband has become incapacitated due to Alzheimers. Fortunately, when he signed his Will in 2006, he also signed a durable general power of attorney which authorized his wife to establish a revocable trust for him. She may only exercise this power if the dispositive provisions of the revocable trust after the husband’s death are consistent with his Will. This means that she will not be able to change the manner in which his assets will be distributed.

The wife is making a change to her dispositive provisions. She is changing the bequest to her son from an outright disposition to a bequest in trust. She would like to make the same change to her husband’s revocable trust and is confident that he would approve of this change if he was able. However, she does not have this power under the power of attorney. If the husband dies first, his assets pass to two separate trusts that will benefit the wife during her lifetime and will give her a testamentary limited power of appointment over the trust assets upon her death. Therefore, if the husband dies first, the wife will be able to change the son’s bequest from her husband to a trust. She would have this power under his current Will; therefore, she is not changing anything that would otherwise happen if her husband did not change from a Will to a revocable trust.

After the wife signs the revocable trusts, she will change ownership of various assets to the trusts. This will allow probate to be avoided for both clients, will simplify the management of the assets during my clients’ remaining lifetimes, and will simplify the disposition of my clients’ assets following their deaths.

If you choose to use a Will to dispose of your estate, consider signing a power of attorney that gives your agent the ability to create a revocable trust for you after you become incapacitated.  This can make it easier to manage your assets during your remaining lifetime and simplify the dispositon of your assets following your death.   

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In his State of the Union address on January 25th, 2011, the President made the following statement: “Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change."

I agree with the President that we have an unfair tax system. It is exceedingly complex and has numerous laws that are nonsensical. For example, a law was passed in 2001 that encouraged wealthy people to die in 2010. Numerous attempts to remove this perverse incentive were rejected by Congress. On December 17, 2010, the 2001 law was reaffirmed in a deal brokered by the President. The new law also created a new incentive for wealthy people to die in 2011 and 2012. I have decided that I will not encourage my clients to take advantage of this tax savings “opportunity.” I hope the President will approve of my decision.

I must take exception with the President’s criticism of my profession. I have an ethical duty to do the best job that I can of counseling my clients on how to arrange their affairs to lawfully minimize their tax obligations based upon the laws that Congress and the President have enacted. Indeed, I should be disbarred if I concealed from my clients the laws that Congress has passed that would allow them to reduce their tax obligations.

President Obama is an attorney himself. He knows our ethical obligations. I have some advice for the President: Don’t blame others for following the laws that he is at least partially responsible for passing. Enact fair and simple tax laws and you will have a system that is fair and simple.
 

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Jeff Mobley prepared the attached summary of estate, inheritance and gift tax facts. The chart provides various exemptions and rates under federal law and Tennessee law for 2011 and future years.

As you will see from the chart, Tennessee law is very stable. Federal law has another significant change occurring in less than 24 months.

I would like to vote for politicians who will pass stable, predictable, tax laws. When I voted last November, I was unable to find any federal politicians in this category.  

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Last week, the attorneys in our firm gave a presentation to the Nashville Society of Financial Service Professionals titled "The New Estate & Gift Tax Laws - The 2-Year Window of Opportunity.” The presentation was a joint effort by Bryan Howard, Jeff Mobley, Stephanie Edwards, and our two newest members, Paul Hayes and Paul Gontarek, who joined us at the beginning of the year.

Paul Hayes is an experienced estate planner like the rest of us, and is also a CPA and a Certified Financial Planner.

Paul Gontarek specializes in trust and estate litigation, which seems to be a growth industry due to  increased life expectancies and other societal changes.
 

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A previous article explained that IRA account holders who did not make a charitable distribution in the last two weeks of 2010 can make a $200,000 Charitable IRA Distribution in 2011, provided that at least $100,000 of the distribution is made by January 31, 2010. One of my clients asked whether there is any way for him to convert his 2010 required minimum distribution (“RMD”) into a charitable distribution.

My client took his RMD of $82,000 on December 1st prior to going to Florida for the winter. He would now like to give the $82,000 to charity so that he does not have to pay tax on the RMD. Unfortunately, there is no way for him to avoid paying income tax on the RMD.

He can make an $82,000 distribution from his IRA to charity in January, 2011. If he had not taken the RMD in 2010, he could treat the January distribution made to charity as a non-taxable RMD for 2010. However, since he already received the $82,000 as a taxable RMD, the January gift will not help him to reduce his 2010 income taxes.

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This is the second article of a series dealing with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Act”). For the first article, see: Part 1 – Charitable IRA Rollovers

The Act retroactively reinstated estate taxes to apply to decedents who died in 2010. However, the Act provided two relief provisions. First, the federal estate tax exemption for 2010 decedents was $5 million. Second, the Act allows executors to elect the carryover basis regime for 2010 decedents if that regime is preferable to the estate tax regime.

We represent several estates that plan to elect the carryover basis regime. The carryover basis regime may result in future income taxes; however income taxes are less than estate taxes. Most estates of $10 million or more will elect the carryover basis regime. This is because the estate tax regime would result in estate taxes, either now or upon the death of the surviving spouse. Estates of unmarried decedents with more than $5 million will generally elect the carryover basis regime.

Estates worth $5 million or less will stay with the estate tax regime. They will not owe any federal estate taxes and all assets owned by the estate will receive a stepped-up basis.

The Executors for married decedents whose estates were between $5 and $10 million will have to analyze the two regimes. When the available basis step-up of $4.3 million is enough to increase the basis of all assets to date of death value, the estate should elect the carryover basis regime. When the basis step-up is not enough to eliminate all pre-death gains, the executor will need to analyze whether future income taxes to be incurred on pre-mortem appreciation will be more than future estate taxes to be incurred upon the death of the surviving spouse.

The analysis of future income taxes and future estate taxes requires a crystal ball. Income taxes might be avoided if the surviving spouse gives appreciated assets to charity or holds them until death. Estate taxes might be avoided if the surviving spouse makes sufficient gifts or if the $5 million federal estate tax exemption is extended until the year of the spouse’s death.

The Act did not specify how or when to make the election to be subject to the carryover basis regime. The Act specified that the Form 706 for decedents subject to the estate tax regime does not need to be filed until September 17, 2011. I expect guidance from the IRS clarifying that the carryover basis election can also be made as late as September 17, 2011.

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On December 17, 2010, the President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Act”). In addition to extending the so-called “Bush” income tax cuts for two years, the Act made several significant changes to estate, gift and generation-skipping transfer taxes. This article is the first of a series summarizing various provisions of the Act.

The Act extended for 2010 and 2011 the ability of taxpayers who are at least 70½ years of age to transfer $100,000 per year from their IRA to charity. If you missed this opportunity in 2010 and may want to give more than $100,000 during 2011, you can do so if you act by January 31, 2011. There is a special provision that allows you to use the amount you didn’t use in 2010 during January 31 of 2011. Assume, for example, that you made a Charitable IRA Rollover of $20,000 on December 28, 2010. You can give as much as $180,000 in 2011. However, at least $80,000 of the 2011 Rollover must occur on or before January 31, 2011. You would then be able to give the other $100,000 any time during the year.

If the most that you would give in 2011 is $100,000, then you do not need to worry about the January 31 deadline. If you might give more than $100,000 this year, then you should roll over part of the gift before the end of January. For example, if you might give $150,000 this year, you should give at least $50,000 by January 31.

Before making a Charitable IRA Rollover, you should investigate making a Synthetic Charitable IRA Gift. The Synthetic Gift technique also helps those who do not qualify for a Charitable IRA Rollover or do not like some of the restrictions imposed with respect to Charitable IRA Rollovers.

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