The State of the Federal Estate Tax

Posted on February 2, 2010 by John O'Brien

At this point, almost everyone is already well aware that in 2010 there is no estate tax.  This has become very obvious because of the significant press coverage.  There is, however, another change in the law that equally affects everyone.  This change is not so well known.  It's the change to the "step-up" basis rules.

Up through December 31, 2009 one who inherited property would come to own that property at the fair market value of the property as of the date of death.  In other words, if the house had a fair market appraised value of $500,000, it would be inherited at $500,000.  This was known as "stepped-up basis."  Simple enough.

As of January 1, 2010, the step-up basis rules are out.  New basis rules are in.  New IRS Section 1022 provides that the property is now inherited at carryover basis.  In other words, the decedent's original cost basis will "carryover" to the estate.  Put simply, if it cost $400,000 to buy the asset, that's the value it will be inherited at.  So now the property would be owned at $400,000 and if sold for $500,000 there would be a capital gains tax on $100,000 or a $15,000 tax burden ($100,000 x 15%).

However, IRS 1022 also allows the executor or representative of an estate to assign up to $1.3 Million in basis increase (not to exceed fair market value).  This amount can be further increased by any unused built-in losses and loss carryovers.  So let's say the property is worth $2.5 Million and the decedent's cost for that property was $200,000.  With allowed basis increase, the basis would now be $1.5 Million ($200,000 + $1,300,000).

The new rules also allow basis increase for property left to a surviving spouse.  The executor or representative can assign up to an additional $3 Million (not to exceed fair market value).  This applies to property left either outright to the spouse, or as qualified terminal interest property (QTIP).  It is therefore critical for people to make sure their estate plan is presently drafted so as to be eligible for the $3 Million spousal property increase.

The other obvious fact with the new rules is that a 2010 estate will need to establish the decedent's basis in the property.  Going back many years to document what it cost for the decedent to buy the asset could prove to be quite a cumbersome task.

The long and short of it is that 2010 is an interesting year.  I hope this gets you thinking.  Let's see what Congress does next, if anything.

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Follow Tom And Ellen On Their T&E Journey

Posted on January 8, 2010 by John O'Brien

One of my goals in 2010 is to get the public to understand the need for estate planning. I want to change the fact that at least 70% of the American public does not have an estate plan. So to help everyone understand the importance and value in having one, I’ve decided to tell one fictitious couple's life story. We will follow their life and highlight the estate planning issues facing them at the various stages of their life.

Lack of understanding often creates fear and fear will always stop us in our tracks.  Let’s, together, learn, get beyond the fear of estate planning, and conclude that a well planned estate plan is essential at all stages of life.

So please follow me as I tell the tale of Tom and Ellen.  More to follow. . . .

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Using an Irrevocable Life Insurance Trust (ILIT) As An Estate Planning Tool

Posted on August 21, 2009 by John O'Brien

Just had a new client in the office for some planning.  As part of his asset picture, he had a $1 M life insurance policy he owned with his four kids as the beneficiaries.  As I explained the potential estate tax implications based upon his asset picture, his eyes widened as I explained that there would be a tax due the State of Connecticut on his estate because he was over the $2 M threshold.  He then insisted that his estate was actually only worth $1.5 M and thus he was not over the threshold.  I then further explained that his estate was actually worth $2.5 M -- $1.5 M in real estate, stocks, etc. and $1 M from the death benefit from the life insurance policy.

I see this scenario a lot in my practice.  People who ordinarily would not have to worry about estate taxes suddenly realize that because of life insurance policies, they are now over the Connecticut exemption.  All of this can very easily be avoided, however.  Instead of the client owning the life insurance policy, the policy should be owned by an Irrevocable Life Insurance Trust (ILIT).  The beneficiaries can still be listed in the Trust Agreement as they would on the Beneficiary Designation Form for the policy.  The Trust would make the premium payments, by the client making a gift to the Trust every year for the premium payments.  Provided the Trust is drafted and administered properly -- the client has no ownership interest and the beneficiaries have a Crummey power (I won't make your eyes gloss over by explaining that), then the death benefit to the Trust will not be a part of the client's estate and no estate tax will be due.

Anyone with a life insurance policy of $1 M or more should have an ILIT.  Why?  Well, because with other assets such as real estate, stocks, etc. coupled with a life insurance policy, one can very quickly be pushed beyond the $2 M Connecticut exemption.  And as I've blogged before, if your estate has a value of $2,000,001 your estate will owe $101,700 which is $101,700 less than your beneficiaries will get.  You can get an ILIT drawn up for a lot less than that.  So unless I'm missing something  .  .  .  it's a no brain-er!

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Thrilled To Be Your Personal Family Lawyer®

Posted on August 5, 2009 by John O'Brien

Too often the relationship between a client and his/her estate planning attorney is focused solely on getting the documents executed.  Very little, if anything, happens after that.  There is no follow-up and over the years, the plan becomes stale and out-of-date because life changes.  Clearly there has to be a better way.

That better way is called a relationship -- a relationship based upon regular -- at least monthly -- contact and dialogue with the client.  I remember growing up, my family having a relationship with our lawyer, and with pride saying "Dave is our lawyer."  Contact and dialogue was constant.

A visionary, Alexis Martin Neely, is nicely bringing back that lost approach.  She is doing so through her Personal Family Lawyer® Program. I am happy to say that I applied, interviewed and have been accepted into this Program.  So I look forward to becoming your family's Personal Family Lawyer®.  More can be found at personalfamilylawyer.com and I'd be pleased to tell you more.

 

 

 

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Mission Accomplished!!!! Connecticut's Pet Trust Statute

Posted on June 3, 2009 by John O'Brien

The House passed the proposed Pet Trust Legislation yesterday.  It now goes to the Governor for her signature and I can't think of any reason why she wouldn't sign it.  Assuming that she does, as of October, 2009 Connecticut will join the ranks of many other states and have a Pet Trust Statute on the Books.

Many thanks to Senator McDonald, Representative Lawlor, Representative Morin, Senator Boucher and Representative Hetherington for all of their hard work in getting this Legislation passed.  We will, under a separate posting, post the Law as enacted by the State Legislature.

 

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That Much Closer! Connecticut's Pet Trust Statute

Posted on May 28, 2009 by John O'Brien

I am just back from the Capitol and have encouraging news to report. 

The Senate has voted favorably on the Pet Trust Statute. It now goes to the Floor of the House for action.  We will keep everyone informed.

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Benefits of a Revocable Living Trust

Posted on May 26, 2009 by John O'Brien

There are real benefits to a Revocable Living Trust, as part of a client's estate plan.  In my opinion, three stand out.  They are:

(1)    Avoiding probate;

(2)    Easily continued business/personal affairs during any period of incapacity; and

(3)    Avoiding ancillary probate.

For many of our clients, the third -- ancillary probate -- makes the case.  If you own real estate in more than one state, you will need to file  probate in each state.  And while your executor/personal representative may get away without having an attorney in your "home" state, you will most definitely need to hire one in the other state.  Both time and money are increased.  You will not, with a properly funded Revocable Living Trust, need to file probate at all in either state.  Certainly that's a significant savings and, thus, if you own property in more than one state, it's advisable to have a Revocable Living Trust.

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Are We There Yet? Connecticut's Pet Trust Statute

Posted on May 20, 2009 by John O'Brien

Not quite there yet.  Progress has been made, however.  I previously blogged that in the Bill pending in the Senate had language requiring Probate Court approval of any Pet Trust.  I was always negative on this language.  Through discussion and hard work by several people, it is possible that language may be removed from the Bill.

Alternate language requiring any Pet Trust to have a trust protector may be inserted.  Put simply, the trust protector is someone/somebody other than the trustee.  The function of the trust protector is to ensure that the trustee is properly looking out for the pet(s).  Increasingly,  estate planners are using trust protectors in their trust agreements and it's particularly beneficial in the case of a Pet Trust where the pet beneficiary can not speak for itself.

So, the Bill is still pending in the Senate.  It's on their calendar and hopefully will be amended as indicated above.  Assuming it gets favorably voted out of the Senate, it will go to the House.  All of this must happen before the Legislature adjourns on June 3, 2009.  We're pushing!  Let's hope we finally get it done.

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Potential Positive Delopment in Connecticut's Push to Enact a Pet Trust Statute

Posted on May 6, 2009 by John O'Brien

Some further development.  Through on-going negotiations, it is possible that the language requiring probate court approval of any Pet Trust may  be removed from the Bill.  For many reasons, including the logistical problems, and the unnecessary expense, I'm very much in favor of deleting this language.  This is on-going and we will keep you informed.

Following the trend, Maryland's Legislature recently enacted a Pet Trust Statute there.  This was nicely reported at www.pettrustlawblog.com.  I encourage all to visit Attorney Meek's Blog where he very nicely blogs about many relevant items for per owners.  Keep it up Dan! 

My hope is that Connecticut will follow the nation's lead, and most recently, Maryland and enact a Pet Trust Statute.  We can then all applaud.

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Is a Life Settlement Right For You?

Posted on May 5, 2009 by John O'Brien

As part of a yearly review of our clients existing estate plans, we are sometimes presented with life insurance policies that no longer provide appropriate benefits.  The existing policies may no longer be necessary as part of the overall plan.  But don't just stop paying the premium and let the policy lapse.  We review with the clients whether a Life Settlement might be appropriate.  In a Life Settlement, the client sells the existing policy in the secondary market, the third-party takes on ownership of the policy and the client gets a cash payment which can be more than the cash value of the policy.

With the cash, the client can invest it elsewhere, buy a different life insurance policy or even donate it to charity.  Some guidelines to think about as to whether you are a good candidate for a Life Settlement include:  (1) at least 65 years of age and oftentimes best to be 70+ years of age; (2) life expectancy of at least two years; and (3) the policy to be sold must be beyond the contestable period.  Most importantly, you along with your advisor should conclude that the policy to be sold is truly no longer a valued part of your overall estate plan.

A recent example we were involved with will help demonstrate the potential benefit of a Life Settlement.  The client was an 80 year old female who had about 8-10 years ago purchased a universal life policy.  Originally, the policy was purchased as part of her estate plan with the thought that the policy would be used to take care of an estimated estate tax liability.  As the years passed, through good continued planning, she was now at a point where her expected estate tax liability had declined and thus the policy really was no longer needed.  It had also become somewhat expensive for the client to keep up with the premiums.  We put her in touch with a Life Settlement broker who was able to get her a $302,000 cash payment which she used to make a charitable donation.  The client and the charity benefited from this transaction.

Take a look at your existing life insurance policies and talk with your advisors about whether a Life Settlement is right for you.

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