Heckerling
Institute 2005
Reports from the event, as
posted to the ABA-PTL List Serve |
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This Report contains coverage of the Thursday Fundamentals Session
involving While You Wait: The EGTRRA and What to Do While Congress
Ponders the Fate of the Estate and GST Taxes
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Estate Planning While You Wait: The EGTRRA and What to Do While
Congress Ponders the Fate of Estate and GST Taxes
Thursday, 1/13/05
Presenter: Howard M. Zartisky Esq.
Reporter: Connie T. Eyster Esq.
Mr. Zaritsky thinks that the estate tax will almost certainly be
repealed. The House of Representatives has had enough votes for
repeal for a long time and now the 60 votes needed in the Senate
are
almost certainly there.
For planning purposes, however, practitioners should not focus
on what
might happen but on the law we currently have.
Even if there is a repeal of the estate tax, estate planners will
not
be out of business. We will still need to plan for non-tax reasons
such as creditor protection and there will still be state estate
taxes, carry-over basis rules, and income taxation of retirement
benefits to worry about.
Note that if you do a QDOT and the estate tax is repealed, you
may be
paying estate tax when no one else is paying that tax. It may be
better to give property outright to a non-citizen spouse and use
disclaimers to fund a QDOT if necessary.
The retention of the gift tax is more than a little relevant. Mr.
Zaritsky believes that there must be one heck of a compelling
situation to justify making a taxable gift now. Note that if a client
made $675K worth of gifts before 2001- the client might not be able
to
make an additional $325 of gifts because of shifting rates. (See
p.10
of the materials)
If the estate tax is not repealed, many bills in Congress now seem
to
suggest that there will be at lease a $5 million applicable exclusion
amount.
With regard to carry-over basis rules, Mr. Zaritsky does not think
you
need to do any detailed planning for it now because even if the
estate
tax is repealed and we do have carry-over basis, those rules will
likely look very different from the ones included in the statutes
right now. We should be telling clients to keep better records.
Generally, the EGTRRA carry-over basis rules provide that each
individual will have $1.3 million to allocate to basis in his or
her
estate and $3 million to allocate to basis for assets passing to
a
surviving spouse. Nonresidents only get a $60,000 basis adjustment.
Mr. Zaritsky counsels against using "estate trusts" to
obtain the
marital deduction, as it might prevent the allocation of spousal
basis.
The basis allocation also cannot be given to items carrying IRD.
This
will be a big issue for people with a lot of retirement plan benefits.
Note that substitution of carry-over basis for an estate tax will
greatly increase the taxes on the surviving spouse.
Mr. Zaritsky thinks the repeal of the state death tax credit has
an
enormous impact on estate planning. There is a wide variety of rules
out there right now. Practitioners must have a detailed list of
the
location of a client's assets, both tangible and intangible, before
suggesting planning.
Note that, in Florida, the bar has suggested that it is unethical
for
an attorney from another state to provide advice on Florida state
estate tax laws. If other states follow this rule, then it may be
necessary to get formal opinions from local counsel when working
with
a client who has assets located in a state that has a state death
tax.
With regard to testamentary planning, Mr. Zaritsky suggested that
you
may want to put alternative dispositions in your wills, which would
take effect if the estate tax is repealed. However, he suggests
only
including such alternate dispositions if it is relatively easy to
draft them. For instance, if a client would prefer that there were
no
marital trust or no family trust in the event that the estate tax
is
repealed, that would be an easy alternative disposition to draft.
In
other cases where the alternative disposition is more complicated,
it
might be worth waiting until actual repeal to deal with those issues.
Mr. Zaritsky next discussed whether we should be doing new planning
for smallish estates. For estates where the assets of the married
couple are less than the applicable exclusion amount, planners may
choose to make no changes. However, as the applicable exclusion
amount increases, practitioners should start looking at whether
the
non-marital share trust is growing too large and whether the failure
to fund a marital share will make the surviving spouse uneasy or
otherwise cause family tensions.
If the estate is over $1.3 million, but less than the applicable
exclusion amount, there may be some opportunity to do carry-over
basis
planning, but Mr. Zaritsky suggests that he is reluctant to do too
much planning here.
For estates between $1.5 and $2 million, Mr. Zaritsky again suggests
that practitioners should review the size of the non-marital share
trust to determine if it is worth capping it at something less than
the full applicable exclusion, either because of family dynamics
or
because of carry-over basis issues. The problem of over-funding
for
carry-over basis rules was illustrated by the following example.
Imagine an estate of $2 million. If on the first spouse's death,
$1.5
million goes into a family trust and $500K is given to a marital
share. On the second spouse's death there is no estate tax, but
that
spouse may have "extra" basis allocation that goes unused
and assets
distributed to the family trust on the first spouse's death will
be
stuck with their lower basis. One way to address this issue would
be
to put a specific provision in your documents allowing the trustee
of
the non marital share to distribute assets to the surviving spouse
outright in order to allocate basis adjustment on the surviving
spouse's death.
Whether practitioners decide to create a cap on the non-martial
share
or not, practitioners should look at their current marital deduction
formula and figure out what will happen if there were no estate
tax.
You need to have a sense of what repeal would do to your documents
to
know the extent to which repeal should be addressed.
Another technique you might consider is the spousal power of
appointment trust, which works as follows: Husband and Wife each
establish a revocable trust which provides that upon death the assets
will be divided into a marital and non-marital share. If husband
dies
before wife, he is given the power to appoint the assets of wife's
trust to his estate to the extent necessary to take full advantage
of
the estate tax exemption. This ensures that both husband and wife's
assets are included in the estate of the first spouse to die and
ensures that the full applicable exclusion amount will be used on
the
first death.
Note that under current law, the assets that were in wife's trust
will
not receive a new basis on husband's death, but a bunch of PLR's
suggest that is technique works just fine from an estate inclusion
perspective. ACTEC has asked the IRS to give us a revenue ruling
on
the estate inclusion issue.
Mr. Zaritsky also likes the use of a total return trust as a planning
technique in this environment. It is a nice way to eliminate fights
when we have a very large non-marital share and a 2nd marriage.
Note,
practitioners should NOT promise beneficiaries that total return
trusts will result in greater overall returns. Rather, the
practitioner should focus on the family dynamic benefits. Also,
Mr.
Zaritsky suggests that, administratively, using January 1 as a
valuation date is the best approach. With regard to defining the
unitrust amount, use of a 3-5% is probably fairly safe.
Mr. Zaritsky also discussed the intersection between carry-over
basis
and the marital share. One big rule to know is that the $3 million
spousal property election cannot be made on property passing to
a
general power of appointment trust (estate trust), but rather can
only
be allocated to distributions passing outright to the spouse or
to a
QTIP trust.
As a practice pointer, Mr. Zaritsky suggests giving direction to
fiduciaries in your documents regarding how the basis allocation
adjustment should be applied. First and foremost, the fiduciary
should be given absolute authority to select which assets get which
allocations, and should be exonerated for making basis adjustments
that treat beneficiaries unequally so long as the fiduciary is acting
in good faith. You may also want to give the fiduciary direction
to
allocate the basis adjustment first to assets which will generate
ordinary income.
With regard to the differences in state death tax exemption amounts
–
the decoupling can result in payment of state estate tax even when
no
federal tax is due. The easiest way to deal with this issue is to
encourage clients to give away their property held in states where
there is a state estate tax. Another planning technique may be to
take a tangible asset and contribute it to an entity so that the
ownership is now an intangible asset, although there is some question
whether that technique will actually work based on applicable state
law. One very important issue is to ensure that your client cannot
be
deemed to have more than one domicile. See p. 132-135 of the
materials.
(Note that there is a correction in the materials on p. 137.
Paragraph (d) should start "without regard to whether this
affects the
state estate death taxes.")
One way to address the issue of marital deduction formulas in a
state
where there is a state estate tax is to create several testamentary
trusts as follows:
(a) create one trust that will hold property up to the applicable
state exemption (assuming that the state exemption is less than
the
applicable federal exclusion amount).
(b) Create one trust that has QTIP provisions which Mr. Zaritsky
calls the "spousal non-marital share"- that holds the
amount of
property which is the difference between the federal and the state
exemption amounts. You can make a QTIP election for this trust which
will be ignored for federal purposes because it is not necessary
to
make this election in order to reduce the estate tax to zero. See
Rev. Proc. 2001-38. The election, however, may be respected for
state
estate tax purposes because it is necessary to reduce state estate
taxes to zero. This technique will not work in a state that does
not
permit the making of inconsistent elections.
(c) Create one trust to hold the balance as a marital share.
In general, it is best to draft documents to be as flexible as
possible. The easiest way to stay flexible is to give the trustee
broad powers of distribution. Mr. Zaritsky suggests using an
independent trustee and giving the beneficiaries broad powers to
remove and replace the trustee.
Mr. Zaritsky concedes that disclaimers allow for a great deal of
flexibility in planning, but in his experience, it is too easy for
the
beneficiaries to destroy this planning option post-death and
practitioners would be unwise to rely too heavily on it.
Mr. Zaritsky's preferred flexible planning technique is to place
all
of the decedent's assets in a QTIP trust and allow the fiduciary
to
make a QTIP election with regard to some or all of the trust. The
downside to this technique is that all of the trust income is
distributable only to the surviving spouse.
Another, similar option, would be to put all of the decedent's
assets
into a "Clayton QTIP," which would permit the trustee
to transfer
the assets for which the QTIP election was not made to a family
bypass
trust. This would permit the sprinkling of income for assets not
included in a marital share. (See p. 136 of the materials). The
downside of this form of trust is that it cannot be used to create
shares that are deductible for state death tax purposes but are
not
deductible for federal estate tax purposes.
In summary, with regard to testamentary planning, practitioners
should:
1. Plan with law we have today
2. Plan for the state death tax credit by, to the extent possible,
eliminating property held in states with a state death tax credit.
If
you can't get rid of that property, create different non-marital
division for state and federal purposes.
3. Recognize the possibility of carry-over basis principles and
authorize the trustee to make distributions of property to take
advantage of surviving spouse's basis allocation
4. Use independent trustees and give them authority to revise the
trust to accommodate changes in the law.
5. Consider reciprocal power of appointment trusts.
With regard to lifetime planning, Mr. Zaritsky again reiterated
that
you would need an extraordinary fact pattern to justify making taxable
gifts right now.
If a client is making lifetime gifts, an ideal asset to give away
now
is one that has a low basis but which is unlikely to be sold
suchh as
an asset with sentimental family value.
Interfamily sales are also ideal transactions during this difficult
period. They freeze estate tax values and do not incur a gift tax,
When using discount planning, practitioners should be cognizant
that
gifting during life throws away the option to allocate new basis
at
death and if the assets are discounted, you might never be able
to get
the basis up to fair market value.
Life insurance planning can still be valuable see pages 199-200
oof
the materials. Never advise a client to cancel life insurance at
the
first meeting. Mr. Zaritsky suggests that funds should be borrowed
against the policy first, and then terminated if in fact the policy
is
no longer necessary. He is very hesitant to dispose of a policy
we
can't replace.
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Our on-site local reporters who are present in Miami this year are
Gene Zuspann Esq. of Zuspann & Zuspann in Denver, Colorado,
Shelly Merritt Esq., a solo practitioner in Boulder, Colorado, Connie
T. Eyster Esq. of Hutchinson, Black & Cook LLC in Boulder, Colorado,
Jason Havens Esq. of Havens & Miller PLLC in Dustin, Florida,
Bruce Stone of Goldman, Felcoski & Stone, PA of Coral Gables,
Florida, Herbert L. Braverman Esq. of Walter & Haverfield LLP
in Cleveland, Ohio, and Jeffry L. Weiler of Benesch, Friedlander,
Coplan & Aronoff LLP of Cleveland, Ohio. The editor again this
year will be Joseph G. Hodges Jr. Esq, a solo practitioner in Denver,
Colorado who is the Chief Moderator of the ABA-PTL List.
GENERAL INFORMATION ABOUT INSTITUTE
Inquiries/Registration
Philip E. Heckerling Institute on Estate Planning
University of Miami School of Law
Center for Continuing Legal Education
P.O. Box 248087
Coral Gables, FL 33124-8087
Telephone305-284-4762 / FAX305-284-6752
Web site www.law.miami.edu/heckerling
E-mail heckerling@law.miami.edu
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