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

The FDIC has published a brochure explaining the amount of FDIC insurance for various situations including revocable trusts, irrevocable trusts, and entities such as corporations and LLCs.

Revocable trusts can easily qualify for $1,250,000 of coverage, and may qualify for even higher coverage in very narrow circumstances. Irrevocable trusts generally are limited to $250,000 of coverage. Likewise, entities are limited to $250,000 of coverage. The good news is that it is easy to expand the amount of coverage well beyond $250,000 by setting up accounts in the names of trusts and entities.

A lot of my clients add the names of their children on various accounts in order to expand FDIC coverage.  These arrangements have gift tax risks and may distort the client's overall estate plan because the accounts will belong to the children after the client dies. 

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I recently met with clients who own a very valuable home in Florida. We discussed the potential use of a revocable trust to avoid the need for ancillary probate in Florida following their deaths. We subsequently discussed ideas for reducing their estate taxes, including the use of a QPRT for their Florida home. My clients decided to proceed with a QPRT, but decided not to use a revocable trust since it is not needed for avoiding Florida probate.

The wife is a few years younger and has no known health concerns; therefore, she is the better candidate to establish the QPRT. She will transfer one-half of the home to a QPRT with a 10-year term and one-half of the home to a QPRT with a 13-year term.

Using two QPRTs instead of one accomplishes two purposes: First, it allows a fractional interest discount for both halves of the house. This can be as much as 25 or 30 percent. Second, the mortality risk is hedged somewhat. If the wife dies after 11 years, she will have succeeded in removing one-half of the home from her estate. We are hoping that she survives at least 13 years and removes the whole house from her estate.

The combined GRAT discount and fractional interest discount amount to about 50% of the current value of the home. This means that my clients will be making a $2.2 million gift at the current time. There are no federal gift tax concerns due to the current $5 million federal gift tax exemption. Because the gift is Florida real estate, it will not be subject to Tennessee gift taxes. Thus, this asset is an ideal way to take advantage of the current high federal gift tax exemption without having to pay Tennessee gift taxes.

It is likely that the home will appreciate between now and the date of death of my clients. Assuming the wife lives at least 13 years, none of the appreciation will ever be subject to transfer taxes.

In summary, when you own a home in another state, you might consider using a QPRT to avoid ancillary probate and to reduce estate taxes.
 

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I highly recommend that my clients keep their original Will in their lockbox because the original must be located in order to probate the Will. It is possible to probate a copy of the Will. Generally, you can only probate a copy if no one objects.

If the first person to find your Will does not like its provisions, they might “lose” the Will because they will fare better if you do not have a Will. If the Will is lost, those who would have fared better will find it very difficult to overcome the presumption that the Will was revoked.

The attached case of two stepchildren against their stepfather, Janice Davis Boelter and Richard Davis v Jackie Curtus Reagan et al, demonstrates the problem. The decedent’s will gave her entire estate to her two children, leaving nothing for her husband (who was not the father of her children). After her death, her children were unable to find her Will, which had been executed 16 years prior to her death. The Will may have legitimately been lost. However, it is also possible that her second husband found the original Will and discarded it because he didn’t like its provisions.

Because the children were unable to locate the original Will, the estate was administered as if the decedent did not have a Will. This meant that the husband received a significant share of the Estate.

I have been involved in another case where a Will could not be found. There was a suspicion that the Will had been fraudulently destroyed by a person who had access to the decedent’s records after the decedent had become mentally incapacitated. No one could prove that the Will had been fraudulently destroyed because it is very difficult to prove a negative.

So what should you do with your original Will? Assuming you choose to keep your own original, you should put it in a lockbox and not allow those who would fare poorly under the Will to have access to your lockbox. Some of my clients leave their original Will with a trusted advisor such as a CPA, attorney or banker.  In addition to making sure that your original Will is retained in a safe location, you should periodically confirm that your original Will is still where you want it to be.

Another possible solution is to use a funded Revocable Trust as the document that disposes of your assets following your death. An original of your Revocable Trust does not need to be produced for any reason. A copy of the Revocable Trust will suffice to allow your successor Trustee to distribute the assets in the trust, even if the original cannot be located. 

The reason for having a Will is to make sure that your assets are distributed in accordance with your wishes.  It would be a shame for your plans to be thwarted due to a lost Will.
 

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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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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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Some people mistakenly assume that their Will controls the disposition of all of their assets. There are several ways that your assets pass to someone outside of your Will.

Assets that are owned as tenants by the entirety with your spouse or joint with right of survivorship will pass to the other owner or owners by operation of law.

A large number of assets pass by beneficiary designation. Common examples are bank accounts, retirement accounts such as 401(k) plans and IRAs, and life insurance. See the enclosed article from Fidelity regarding important considerations in your choice of beneficiary designation.

If you transfer ownership of your assets to a trust before you die, the trust will dictate how the assets pass upon your death. A number of my clients have transferred all or a portion of their assets to a revocable trust or an asset protection trust.

Under Tennessee law, your spouse is entitled to elect against your Will and receive a share of your estate, year’s support, exempt property, and homestead. As a general rule, your spouse will elect to receive these benefits when they are better than the Will.

Even if your Will does not direct your Executor to pay your debts, your creditors will file claims against your estate and will be paid prior to the beneficiaries named under your Will.

Even if your Will does not direct your Executor to pay your tax obligations, the IRS and the State of Tennessee have priority over the beneficiaries of your Estate regarding the payment of income, inheritance, estate and generation-skipping transfer taxes, including interest and penalties. They have a “secret” lien against all of the assets of your Estate. If the Executor of your Estate fails to pay your tax obligations, the IRS and the State of Tennessee will be able to collect taxes from your Executor (to the extent that the Executor has distributed assets to the beneficiaries) or from the beneficiaries of your Estate (to the extent that they received assets from your Estate or from other methods such as beneficiary designations).

Because there are so many ways to receive assets that are not dependent on the terms of your Will, it is very important to make sure that you account for all of these potential non-testamentary transfers when planning for the disposition of your assets.

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I recently met with a couple for whom I prepared Wills in 2006. They want to make a change to their Will because a member of their family died unexpectedly. When they went to their lockbox, they were unable to find their original Wills. Fortunately, they still have the ability to sign new Wills.

What would have happened if one of my clients had died and the survivor was unable to find the Will? It is likely that we could have probated a copy of the Will. Tennessee law allows a Court to probate a copy of the Will when there is credible testimony that the Will has been lost and that there was no intention to revoke the Will. I have successfully probated copies of Wills on 6 or 7 occasions. Every time that I have probated a copy, no one objected and a close family member was able to give credible testimony about the Will being lost.

You should assume that your heirs will be unsuccessful in probating a copy of your Will. When the original Will cannot be found, there is a strong presumption under Tennessee law that the Will was revoked. There have been numerous cases where the Court refused to probate a copy of a Will. If the Court refuses to probate the copy, the Court will choose an administrator to manage your estate and distribute your assets according to the intestate succession laws of Tennessee.

Due to the problems caused when your original Will cannot be located, it is very important that you keep your original Will in a lockbox or other safe location. You also need to make sure that one or more trustworthy persons knows the location of your original Will.

Revocable trusts do not have the same problem. The Trustee does not have to produce the original Trust Agreement in order to carry out its duties. This is another potential benefit of a revocable trust.
 

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When someone dies, their estate becomes a separate taxpayer for income tax purposes. Estates are allowed to choose their tax year. We generally recommend that estates elect the longest fiscal year available, which is the end of the month preceding the one-year anniversary of the decedent’s death. For example, the latest fiscal year that can be elected for a decedent who dies in April of 2010 is March of 2011. The reason that we generally elect a fiscal year is to postpone the time when income taxes will be paid on income earned by the estate.

Revocable trusts are also allowed to make the same fiscal year election, though they are required to make a separate election (referred to as a Section 645 election) with the IRS.

Federal income taxes will be increasing for tax years beginning after December 31, 2010. The maximum rate for dividends will increase from 15% to 39.6%. The maximum rate for capital gains will increase from 15% to 20%. The maximum rate for rents and interest income will increase from 35% to 39.6%.

As a general rule, the estate or revocable trust pays taxes on capital gains and taxes on other income is paid by the beneficiaries to the extent the income is distributed, or paid by the estate or revocable trust if the income is retained.

If the estate retains the income, the estate will benefit from making a fiscal year election. If the estate or revocable trust intends to make distributions to the beneficiaries, and the beneficiaries are in a high income tax bracket, the estate or revocable trust may want to avoid a fiscal year election for decedents who die in 2010.  The fiscal year election would cause the beneficiaries to pay higher taxes because the income will be taxed on their 2011 federal income tax returns.

There is a corollary problem for estates that already have fiscal years. If the estate is terminated in 2011 or later, the income will flow out to the beneficiaries in 2011, when it is likely to be taxed at a higher rate. Conversely, if the estate is terminated by December 31, 2010, the income will be taxed to the beneficiaries based on the lower 2010 rates. It is not always possible to accelerate the closing of an estate. However, if there are just a few minor details, it may be possible for the beneficiaries to assume responsibility for the final details in order to allow the estate to close.

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Our firm is assisting Executors and Trustees with the administration of several estates and revocable trusts of decedents who have died during 2010. Administering these estates has presented numerous challenges.

The first problem is that we do not know whether federal estate taxes will be reinstated retroactively. We are advising the Executors that there are two different sets of laws that could apply, either the law that is currently on the books, or another law that has not yet been written. We are guessing that a retroactive law, if one is enacted, will be similar to the law that existed as of December 31, 2009; however, there are no guarantees.

If there is no federal estate tax, this is great news for most of our estates. However, the price to be paid for having no federal estate taxes is carryover basis. I was not practicing law in the late 1970’s when the prior version of carryover basis was the law, but have been forewarned by various practitioners who were practicing during that time period. Carryover basis is even worse than I had imagined.

We are advising Executors to assume that carryover basis is the law. This means that the Executor needs to ascertain the cost basis of the decedent’s assets unless the total value of the assets is less than $1.3 million, or is less than $4.3 million if the decedent was married and leaves at least $3 million of assets to the spouse or a qualified marital trust. Fortunately, most publicly traded securities held in brokerage accounts now list the cost basis. Determining the cost basis of various other assets such as furniture, artwork, real estate and interests in closely held businesses is not so easy.

One revocable trust has a large holding in a single stock. The stock has performed well since the time of the decedent’s death and the Trustee would like to sell a substantial portion of this position. However, the decedent’s basis in the stock was very low and the beneficiaries do not want the Trustee to sell and incur a large capital gains tax. If carryover basis is repealed and stepped-up basis is restored, everyone will be delighted to sell the stock. By the time the law is settled, the value of the stock may have declined precipitously.

Another revocable trust makes a large charitable bequest that will only occur if federal estate taxes are reinstated retroactively. Neither the charity nor the alternate takers can make plans until the law is settled.

Another estate holds significant real estate holdings. The Executor would prefer not to sell the real estate in the current market. Sales are not necessary if there are no federal estate taxes, but sales will be necessary if federal estate taxes are reinstated retroactively. Waiting until the law is settled may be too late to raise money in time to pay taxes if that becomes necessary.

There are numerous income tax planning issues that must be addressed due to carryover basis and all of its complicated rules. There are also carryover basis strategies that should be considered prior to death when you know that death is imminent but have at least a few days to make changes. I plan to discuss these strategies in a future article.

Because of the Tennessee inheritance tax, Executors still have to obtain date of death values, and perhaps alternate valuation date values, for all assets owned by the decedent. This means that Executors for estates of 2010 decedents have more to do than ever before.

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The Tennessee legislature has enacted the Tennessee Community Property Trust Act of 2010. If the Governor signs the bill, the new law will allow resident and nonresident married couples to convert their property to community property by transferring the property to a new type of trust known as a Tennessee Community Property Trust. Alaska is the only other state that allows residents of common law states to voluntarily convert some of their assets to community property.

There are three types of benefits that a Tennessee Community Property Trust will provide. First, community property is a property ownership system that provides for equal ownership of property by husband and wife, including a sharing in the appreciation and income from the property. Some couples may find this equality and sharing arrangement to be a preferred form of property ownership.

Second, community property receives a significant federal income tax advantage. At the death of the first spouse to die, both spouses’ interests in the community property will be eligible to receive a basis increase (not to exceed fair market value), up to a maximum increase of $4,300,000 in 2010, and a full basis adjustment to the fair market value of the property for deaths in 2011 and later years. As a result, there will be no capital gains tax payable if the first spouse dies in 2011 or later and the property is sold for its value after the first spouse’s death. Further, the increased basis will allow for increased depreciation deductions for business and investment depreciable property. If the property had been jointly-owned by the husband and wife in a common law state such as Tennessee, only one-half of the property would receive such an adjustment in basis.

Assume that in 1983 John and Martha Brown paid $200,000 for a farm that is worth $600,000 at the time of John’s death in 2011. Federal tax law allows Martha to increase the income tax basis of John’s half of the farm to $300,000 (one-half of the fair market value of the entire farm). Martha’s basis for her half of the farm will remain at $100,000 (one-half of the original purchase price). Thus, Martha’s total basis in the farm will be $400,000. When Martha sells the farm for $600,000, she will realize a capital gain of $200,000 and pay a federal capital gains tax of $40,000. Federal tax law would allow Martha to increase the basis of the farm to $600,000 if the farm had been held in a Community Property Trust. Thus, when Martha sells the property, she will not pay any capital gains tax.

The third advantage of a Tennessee Community Property Trust is the division of assets owned by the trust for purposes of  funding a credit shelter trust upon the death of the first spouse and obtaining fractional interest discounts upon the death of the surviving spouse. Funding the credit shelter trust and obtaining fractional interest discounts will reduce Federal estate tax and Tennessee inheritance tax upon the death of the surviving spouse. These same advantages can be obtained by converting ownership to tenancy-in-common; however, tenancy-in-common will not allow the favorable income tax advantage discussed above.

A Community Property Trust has the following requirements:
(1) It must declare that the trust is a Tennessee Community Property Trust and contain certain language that gives notice of the consequences of the trust;
(2) At least one trustee must be Tennessee resident or a Tennessee bank or trust company; and
(3) It must be signed by both spouses.

If the spouses divorce, the trust will terminate and the trustee must distribute one-half of the trust assets to each spouse. When property is distributed from a community property trust, it will no longer constitute community property. The equal division of the trust assets upon divorce may be different than the division that would have occurred if assets had not been transferred to the trust.

A debt incurred by only one spouse before or during marriage may be satisfied from that spouse’s one-half share of a community property trust and a debt incurred by both spouses during marriage may be satisfied from all of the trust assets. Thus, a Tennessee Community Property Trust has inferior creditor protection to tenancy by the entirety ownership, and should not be utilized by couples with potential creditor problems.

The new law will become effective July 1, 2010. I expect that Tennesseans will establish a lot of these trusts in July of 2010, similar to the wave of Tennessee Investment Services Trusts that were established in July of 2007 when the Tennessee Investment Services Trust Act became effective. It will take longer for Tennessee banks and trust companies to market the advantages of this opportunity to nonresidents. The advantages will be greater for nonresidents who live in states that impose income taxes on capital gains and rental income.
 

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Federal and state lawmakers continue to pass laws that provide tax and non-tax benefits to trusts. I have often wondered why legislators love trusts so much.

Richard Johnson and I did a presentation to the Nashville Estate Planning Council titled “60 Trusts in 60 minutes.” We came up with 65 different types of trusts. Let me know if we forgot any.
 

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I have received several inquiries about steps that can be taken to protect assets when your spouse or parent continues to drive when they should not be driving.

The obvious answer is to try to persuade the person to give up the car keys. It helps if you can offer a plan for providing transportation assistance. When the person refuses to stop driving, there are some steps that can be taken to protect assets.

I advised one woman to change the ownership of the car from joint ownership to her husband. If her husband has a wreck, this should decrease the chance that her assets will be endangered. Incidentally, you should also change the title for your child’s car when your child turns age 18.

Another couple decided to transfer their assets to two separate asset protection trusts, one for the husband and one for the wife. In addition to providing asset protection, these trusts will operate as a probate avoidance mechanism, similar to a revocable trust.

For years, my durable general power of attorney form has authorized the agent to transfer the principal’s assets to a revocable trust established by the agent for the principal’s benefit. I have now expanded this power to provide the agent with the ability to transfer assets to an asset protection trust established by the agent for the principal’s benefit.

Incapacitated persons seldom attempt to drive. However, I know of situations in which persons with dementia have assaulted other persons. If assets have been transferred to an asset protection trust prior to the assault, the assets should be protected from any monetary judgment resulting from the assault.
 

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The recent turmoil in the financial markets has caused a lot of concern about FDIC coverage for CDs and other bank deposits. It is quite a nuisance for a depositor with hundreds of thousands of dollars or a few million dollars in CDs, to deposit the money in several banks and/or in several different names.

Last fall, the FDIC expanded the amount of coverage available to persons who have Revocable Trusts.  If you already have a Revocable Trust, or are willing to establish one, you can increase your FDIC coverage.

The new rules allow the trust to get $250,000 of coverage for up to five beneficiaries of the trust. Thus, as long as there are at least four persons who will become beneficiaries following your death, your trust can get coverage for $1,250,000 of CDs in the same bank. You can get an additional $250,000 of coverage for a CD owned by you that is payable to your trust upon your death. Several of my clients have used this simple method to obtain $1,500,000 of FDIC coverage for CDs in the same bank.

More information about FDIC Coverage:

• Read the specifics about Revocable Trust coverage at the FDIC site
• Call the FDIC at 1-877-275-3342 with questions about coverage.
• Calculate the amount of your FDIC coverage

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For sound policy reasons, your Will cannot be changed by your conservator or attorney-in-fact after you become incapacitated. The downside of this rule is that it is not possible to make sensible adjustments to changed circumstances, such as changes in the tax laws.

Fortunately, a recent Tennessee law (TCA Section 35-15-602(e)) recognizes a method for you to authorize changes to the disposition of your estate after your become incapacitated. Two years ago, I prepared a revocable trust agreement and a general power of attorney for one of my clients that authorize a family friend to make changes with certain parameters.

Even though my client is now incapacitated, I am preparing an amendment to her revocable trust that will change a $1,000,000 bequest to her daughter to a $2,000,000 charitable lead trust. Estate tax savings from the charitable deduction accounts for the different amounts. For 20 years after my client dies, the charitable lead trust will make payments to charity that the daughter and her children would have otherwise made from their own assets.

The amendment power is a very powerful tool. This power needs to be drafted carefully and should be given to someone whom you really trust.

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