Connecticut Estate Planning Report : Connecticut Estate Planning Lawyer & Attorney : John O'Brien : CT Trust Counsel Law Firm : Wills, Trusts & Probate Litigation

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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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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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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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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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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Clients frequently have amassed a wonderful and valuable art and antique collection during their lifetime.  During the planning process, these assets must be carefully looked at and not simply considered regular personal property to be devised by Will or otherwise at the time the client passes on.  Art and antiques are appreciating assets, and as with any appreciating asset, the goal of a well created estate plan is to remove the appreciating asset from the estate.  The earlier the Hassam painting, the Queen Anne high chest of drawers and the Chippendale chest of drawers are removed from the estate the better.  It helps with the potential estate tax and allows the beneficiaries to enjoy the future appreciation without concern to tax implications.  And while one must always look at gift tax implications, as the Low Art Prices Mean High Time to Make Gifts article from the Wall Street Journal points out, there is no better time than now to pass on your treasure because of present market conditions.

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Connecticut does not impose an estate tax on estates valued under $2,000,000.  Thus, there is a zero tax due on estates valued at $2,000,000 or less.  However, one dollar over the exemption triggers a significant tax.  This is the infamous Connecticut Estate Tax Cliff.  An estate worth $2,000,001 will trigger a tax of $101,700.  Yes, that's $0 to $101,700 in the flash of one dollar.

Certain members of The Connecticut Legislature have attempted to eliminate this problem and have, to date, unfortunately failed.  And frankly, in the present economic climate, it is unlikely that such a measure could be passed. So counting on the Legislature does not make for good present planning.  Don't count on the Legislature, rather look to employ some of the following strategies.

(1)  Make gifts during your lifetime to reduce your estate at or below the $2,000,000;

(2)  Incorporating charitable bequests in planning during life in effect having anything over $2,000,000 paid to a charity or charities; and

(3)  Post-Death Planning can include reducing the taxable estate by legitimately increasing deductions.

These are just a few of the ways the problem is addressed.  Although, it must be addressed in your estate plan.

Those of us thinking that we already have a good plan in place really should have a check-up this year.  Until this year, the Federal exemption and the Connecticut exemption were the same -- they were coupled.  That's not the case now with the Federal exemption at $3,500,000 and the Connecticut exemption presently, and for the foreseeable future, at $2,000,000.  Many plans, with marital planning, are premised on this coupling and should be changed to properly and effectively account for the new difference.

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