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

In the calendar year 2012, individuals can give away as much as $5,120,000 without paying federal gift taxes. This amount is reduced by taxable gifts that were made in prior years. The gift tax exemption will decrease to $1 million on January 1, 2013, unless Congress changes this law. President Obama favors the planned reduction to $1 million. 

If you fail to make a gift this year and the exemption reverts to $1 million as scheduled, there are 2 unfavorable consequences. First, you hamper your ability to help your children without paying federal gift taxes. Second, you may owe significantly more estate taxes upon your death or upon the subsequent death of your spouse.

During 2011 and for the first two months of 2012, we have been working with a number of our clients regarding this opportunity. The process involves much more than just writing a check. Among the issues that our clients are grappling with are the following:

1. Can you afford to make the gift? Said differently, is there a chance that you will run out of money if you make the gift?
2. Are you prepared to pay Tennessee gift taxes? There are several ways to make gifts without paying Tennessee gift taxes; however, these techniques are often impractical.
3. What impact will the gift have on your children?
4. What assets should be given?
5. Are you willing to give up control of the assets you are transferring?
6. Should you transfer “discounted” assets such as fractional interests in real estate or interests in corporations, LLCs, or limited partnerships?
7. Should you make the gift to a trust rather than directly to the recipient? Most of our clients have decided to use a trust.
8. If you use a trust, what are the provisions regarding trustees and distributions?
9. If you use a trust, should you allocate generation-skipping transfer tax exemption to the trust? The answer is usually yes.
10. How will the gift impact your overall estate plan?
11. When should the gift be made?

Even though our clients have unique circumstances, we have seen patterns emerge as to how they have chosen to deal with these various issues. We will be publishing a series of articles that will hopefully help you to navigate these issues.

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Portability allows a surviving spouse to benefit from his/her spouse’s unused federal estate tax exemption. A portability election is made by filing a federal estate tax return within 9 months after the decedent’s death, or within 15 months after the decedent’s death if an extension is requested within the first 9 months.

A number of estates of decedents who died in the first few months of 2011 failed to take advantage of the portability election due to confusion over this new provision and delayed IRS guidance. In light of the confusion, the IRS has decided to allow certain estates to make the election even if they missed the deadline.

Estates of decedents who died during the first six months of 2011 may make the portability election as long as they file Form 706 within 15 months after the date of the decedent’s death. For example, if the decedent died on January 2, 2011, a Form 706 needs to be filed no later than April 2, 2012. This limited group of estates could make the election even though an extension of time to file was not requested. 

At this time, we do not know for sure that the surviving spouse will benefit from portability. As the law is currently written, the surviving spouse will only benefit if he or she dies before December 31, 2012 and would otherwise owe federal estate taxes. Generally, this means that they must have an estate over $5.12 million. Current law eliminates the benefit of portability for surviving spouses who die on January 1, 2013 or later. Even though very few will benefit from the law as currently written, we are still recommending that you make the portability election. President Obama’s budget proposal recommends that portability be extended permanently. Furthermore, portability has widespread support in both houses of Congress.

If you are the Executor of the estate of a married person who died after December 31, 2010, you should consider filing Form 706 to make the portability election even though a Form 706 does not otherwise have to be filed.

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If you ever want to find out the estate planning techniques that are saving the most estate taxes, take a look at a Democratic President’s wish list for making changes to estate and gift taxes. President Obama’s fiscal year 2013 budget proposal recommends numerous changes that would significantly increase estate and gift taxes.

The headlines deal with exemptions and rates. Currently, the estate, gift, and GST exemptions are at $5,120,000. The President wants to reduce the estate and GST exemptions to $3,500,000 and the gift tax exemption to $1,000,000. He wants to increase the rate for estate, gift, and GST taxes from 35% to 45%. 

On the good side, the President wants to make portability permanent. Portability allows a surviving spouse to use the deceased spouse’s unused estate tax exclusion.

Though the changes to the exemption levels and rates are significant, there are a number of other changes that will cost some taxpayers even more in taxes than the changes in rates and exemption levels.

The President wants to make it significantly harder to claim valuation discounts for family limited partnerships. This provision was on President Clinton’s wish list for the last few years of his presidency and resurfaced after President Obama became president. To date, Congress has paid little attention to this recommendation.

The President wants GRATs to have a minimum term of 10 years. This proposal has also been around for 2 or 3 years. Congress has shown some interest in enacting this provision, though there are no current bills of which I am aware.

The President wants to eliminate the use of long-term dynasty trusts to evade GST taxes. His proposal would eliminate GST protection for trusts after 90 years. Trusts created before the enactment of such a rule would be “grandfathered” from this tax so that they could continue to be protected.

Perhaps the most troubling proposal is a new provision that would coordinate income and transfer tax rules applicable to grantor trusts. Under this proposal, assets in a grantor trust would be included in the estate of the grantor for estate tax purposes. Distributions from the trust to the beneficiaries of the trust during the grantor’s life would be subject to gift tax. If the trust is converted from a grantor trust to a non-grantor trust during the grantor’s lifetime, all assets in the trust would be subject to gift tax at the time of the conversion. These rules would apply for trusts created on or after the enactment date and with regard to any portion of a pre-enactment trust attributable to a contribution made on or after the enactment date. My initial reaction to this proposal is that it is totally unworkable and will never be enacted.

For the sake of our clients, I hope that these various proposals are not enacted. They are the heart and soul of the techniques that we use to help our clients transfer more of their assets to their loved ones. However, even if they outlaw these techniques, we will find new ones.

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Dave Shaftel has prepared a detailed comparison of the various Domestic Asset Protection Trust statutes. He analyzes 33 different aspects of the statutes. Tennessee’s laws stack up very well in terms of protection from creditors.

You can see from the enclosed map that Tennessee is the only southeastern state that allows Asset Protection Trusts. Advisors in neighboring states are beginning to recommend Tennessee as the state in which to establish an Asset Protection Trust. 

Delaware is the leading provider of Asset Protection Trusts because they have done the best job of advertising. Unlike Tennessee, Delaware allows certain tort claimants to assert claims against Asset Protection Trusts. Except for this significant difference in Tennessee’s favor, the Delaware and Tennessee statutes are very similar.

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Yesterday was a beautiful day in Nashville. Supposedly, that means we’re in for six weeks of miserable weather. Whether or not we receive all of this dreary weather, we expect the sun to be shining bright in spring and summer.

Like the groundhog, a lot of our clients are able to forecast future conditions for their businesses. We encourage our clients to consider their estate planning when conditions are still cloudy, but the future looks bright.

Yesterday, I met with a business owner whose business struggled during the Great Recession. The tide is beginning to turn, and my client believes the business will become very profitable in the next three to five years. Now is a great time for him to make gifts of company stock to a trust for his children. Due to poor earnings for the last three years, an appraiser will put a very low value on the stock. If the stock performs well in the future, the value of the stock will belong to the trust and not to my client. If the stock does not perform well, then my client will only have a modest estate tax problem. His real vulnerability to estate taxes is the possibility that the business will become very valuable while he still owns it.

Prior to making the gift, we will recapitalize the company stock so that 99% of the stock is non-voting and 1% is voting. My client will transfer all of his non-voting stock to a trust for his son and daughter, and he will retain all of the voting stock. This will enable him to control corporate policy, including the salary that he pays to himself. 

Gifts should be made when the future is uncertain, but there remains a possibility of sunny weather ahead. Apparently this is the technique that Mitt Romney used to establish a trust fund for his children that is now worth $100 million without paying any gift taxes. Mr. Romney must have given assets to the trust before they blossomed into full value. It is really quite easy to do as long as you are willing to make gifts before the business becomes valuable. There are numerous techniques for transferring assets in a tax efficient manner after they become valuable. None of these techniques are as good as making gifts before the assets become valuable.

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