Let’s look at the impact of the estate tax “repeal” situation.  Clearly, confusion reigns.  Congress continues to be deadlocked on how to approach the estate tax situation.  However, there are three likely scenarios and results for the “repeal” situation.

            The three scenarios which every estate plan must address are:  (1) Congress acts, and passes a law that applies retroactively, (2) Congress acts, and the law does not apply retroactively (or retroactive application is found unconstitutional by the courts), and (3) Congress simply does not act!

            This means that the three most likely results are (1) the 2009 structure is extended.  This would result in a $3.5 Million exemption and a 45% estate tax rate; (2) a $5 Million exemption and a 35% estate tax rate would be in effect, or (3) the former $1 Million exemption with a top rate of 55% is reinstated.  In each case, estate plans must take into account the “gap” period (today’s “purgatory” situation where no estate tax is in effect while we “wait” to find out where we’re going!)

            Unless and until Congress acts, there will be no estate and generation skipping tax.  The gift tax is at 35% with a $1 Million lifetime exemption.  Finally, a new income tax system is installed to replace the revenue lost as a result of the estate tax repeal.  This system features a “carry-over basis” regime.  Under this system, there is no automatic death basis “step-up” as we’re used to.

            Under the 2010 system, estate planning document focus must shift to take into account a system that allows for a $1.3 Million step-up in basis allocation, and for married couples, properly addresses the opportunity to access an additional $3 Million step-up in basis allocation.  Documents must cover the current situation and also account for the potential reversion to the system used in the past.

            What can be done, proactively, about this confusion?  First, you should have your plan reviewed.  There are some situations that are more critical than others, but at least six situations can be improved by being proactive.

            First, any document prepared prior to 2001 would obviously not address issues raised by passage of the law in that year.  Everyone in that situation should have their plans reviewed.

            Second, anyone who dies this year is under the capital gains regime developed to “replace” the expiring estate tax.  If you or a loved one have health problems and are at higher risk of dying this year, you will need to determine the basis of your assets.

            Third, if you have developed a plan informally using the estate tax exemption amount to resolve differing distributions, you are at complete risk.  These plans would likely include blended families and charitably inclined people.  Those plans should be reviewed proactively.

            Fourth, all generation skipping plans should be reviewed so that you can be aware of the impact of the new planning landscape.

            Fifth, if you would be affected by a reduction back to a $1 Million exemption, your plan should be reviewed.

            Finally, documenting your planning intent is critical in changing times like these.  Doing nothing - because the estate tax has been “repealed” - is not recommended.

The question in In re: Estate of Max Feinberg (Supreme Court of Illinois, Docket Number 106982, September 24, 2009) concerned the validity of a trust provision which the Court termed a “beneficiary restriction clause”.  Max Feinberg died in 1986.  Prior to his death, he executed a Will and created a Trust.  The pertinent provisions of the Trust were that some of his assets were to be held in trust for the benefit of his grandchildren; however, any of the grandchildren who married outside the Jewish faith or whose non-Jewish spouse did not convert to Judaism within one year of marriage, would be “deemed deceased for all purposes of this instrument as of the date of such marriage”.  In other words, if the grandchildren did not marry within their faith, they would not be entitled to a share of the money left in trust by their grandfather, Max. 

            Last year, the Illinois Appellate Court had found the Trust provision to be unenforceable because they ruled it was contrary to the public policy of the State of Illinois.  (383 Ill. App. 3^rd 992).  The appeal to the Illinois Supreme Court created national interest and several Jewish organizations filed amicus briefs.  The Supreme Court reversed the decision of the Appellate Court, but did not directly answer the broad public policy question.  Because Max’s wife, Erla, had survived him and was given a limited power of appointment to direct assets after her death, her actions superseded those of her husband.  She decided, however, to leave certain assets to each of then living grandchildren of Max who were not “deemed deceased” under the beneficiary restriction clause of Max’s Trust.  Essentially, she was following Max’s wishes.  Because of this intervening act, the Court found that no grandchild had a vested interest in the Trust assets and because the distribution plan adopted by Erla had no prospective application, the Court held that the beneficiary restriction clause did not violate public policy under those limited facts.  So, to sum up, a restriction in a Trust that requires marriage within a faith is not “automatically” or “per se” a violation of public policy, but it might be depending upon the facts.  What do you think public policy should be?

The case of Keller v. United States, 2006 U.S. Dist. LEXIS 34100 (S.D. Tex., May 26, 2006)     is a significant case for utilizing family limited partnerships for asset protection purposes.  Among other things, the Court recognized that Divorce Protection (protecting family assets from depletion by ex-spouses in divorce proceedings) was a legitimate business purpose.

Also in this $40 million taxpayer victory; a family limited partnership was recognized although not formally funded before decedent’s death; a 47.5% discount was allowed for an assignee interest in the limited partnership’s bond portfolio; a bona fide sale exception to Sections 2036 and 2038 applied; and interest on a loan to borrow money from the partnership after death to pay estate taxes and other obligations was held to be deductible for estate tax purposes.

          In the recent decision of Robertson v Deeb, 2009 Fla. App. LEXIS 11322 (Fla. 2d DCA August 14, 2009), the Court held that an inherited IRA is not protected from creditors under Florida law.  Although an IRA ordinarily is exempt from legal processes under Florida Statute § 222.21, the Court held that an “inherited” IRA is not entitled to the exemption because that section is limited to the “original fund or account”.  The Court reasoned that once an IRA was inherited, it became a separate fund or account after the original fund or account passed to a beneficiary upon the death of the participant.

          This decision illustrates why we often recommend that clients name trusts as beneficiaries of IRA’s, so that the creditor protections of the IRA can be extended to future generations. 

The key to the success of a client’s estate plan is to find those attorneys who are values-based, relationship-driven, client-centered, and counseling-oriented.

An effective attorney will have an orientation toward relationship building and counseling rather than document preparation.  The first thing he or she will offer is the ability, through counseling, to draw out the client’s hopes, dreams, fears, and aspirations for himself and his loved ones.  The attorney will carry on a sensitive dialogue that will enable the client to make clear his or her wishes to maintain control over his or her affairs, to be cared for properly in the event of a disability, and to provide meaningfully for loved ones after he or she is gone.

An effective attorney will inquire about the complexities of the family relationships through multiple marriages, special health needs of a grandchild, a son-in-law who is not to be trusted, the spendthrift daughter.  On a more positive note, the right kind of attorney will ask about the client’s wishes to fund the education of children and grandchildren for several generations and philanthropic goals that provide the client with feelings of significance that surpass his success. 

In-depth counseling forms the strong foundation on which a long-term relationship is built.  The effective attorney will involve other advisors in this process to the degree that the client is comfortable with that arrangement.  When a client shares what is really important to him or her now and after death, he develops a strong bond with his professional advisors.

Another trait of an effective attorney is a true commitment to the team approach in estate planning.  A good estate-planning attorney recognizes that every member of the planning team (including the investment advisor, the insurance professional, and the CPA) is vital to the success of the plan.

Legal documents are not enough.  Even documents that have been drafted from in-depth counseling and are custom-designed to meet the unique needs of the client are not enough.  Documents standing alone are like a car without gasoline; the documents’ instructions only apply to assets that are properly owned.

For example, a will only controls those things owned in the individual’s name – not jointly.  The trust only controls those things owned by the trustee of the trust.  An irrevocable life insurance trust works only if it is properly funded with a suitable insurance policy.  Advanced entities require careful balancing of assets for maximum effectiveness.  Accurate valuation of the client’s business interests is imperative.  New planning tools often require additional accounting and tax advice.

The effective attorney will be focused on a long-term (even multi-generational) relationship with the client and his family.  The attorney will not have a transactional approach to the estate plan, but rather a process approach.  The estate plan is never really done until the client has passed away and every instruction for every beneficiary of every subsequent generation has been carried out.  Those who speak of the plan or the client in the past tense may have a shortsighted perspective.

The client-centered estate planning attorney wants to ensure that everything possible is done to make sure that the estate plan is carried to fruition and that the client’s expectations are met.

There is nothing as constant as change.  The client’s personal, family, and financial situations change all the time.  Kids get married and have children; there are divorces and remarriages; and investment values go up or down.

In addition, laws (both tax and non-tax) change constantly.  We have an estate tax.  Then the estate tax is abolished.  Oops, the estate tax is back.  Assets in retirement accounts and trusts generally are protected from creditors and predators.  Some protected assets may not be protected in certain circumstances.

The other thing that should be constantly changing is the growth and education of the attorney and every advisor working with that client.  New estate planning strategies should be developed, new tools should be discovered, and there should be increasingly better ways to express legal and planning concepts.

The effective estate planning attorney has systems in place to ensure he stays in touch with the client, that the planning team knows of changes, and that there are methods to adjust the plan in light of those changes.

The effective attorney will also be aware that for a plan to work well, the people who will help in the future need to know what’s going on.  If the children will someday serve as trustees and personal representatives, the estate planning attorney might educate those children on what to do.  An ongoing relationship with the client and client’s family will help to ensure the success of the estate plan.  Jeffrey A. Cramer of the Cramer Law Center strives to be an effective estate planning attorney.

How you own your property helps determine its distribution when you die or its use if you become disabled. Planning with property you don’t actually own (and this does happen) is no planning at all. This article will discuss the three primary forms of property ownership and how each form of ownership can affect estate planning.

The three primary forms of property ownership include fee simple, tenancy in common, and joint tenancy with right of survivorship. Each form of ownership has its own inherent features.

1. Fee simple is simple. You and only you own the property. Property in fee simple means you own all of it. You can
(1) give it away,
(2) sell it, or
(3) leave it on death.

Is there any pitfall with fee simple property? Yes. Property owned in your own name is subject to both a living probate in case of disability, and a death probate upon death. In short, what may appear to be maximum control, may actually result in a total loss of control. Remember, assets owned in your individual name means probate.

2. Tenancy in common means that you and others own part of an asset. Each “tenant” has less control of the whole property than would one person who owned it in fee simple. With tenancy in common you can
(1) give your part of it away,
(2) sell your part, or
(3) leave your part on death.

Tenancy in common requires that you own the property with one or more other people. Each tenant owns a percentage of the whole asset. For example, if there are two tenants, each owns 50 percent of the asset. If there are three, each owns 33 1/3 percent. The number of possible tenants in tenancy in common has no limit.

For example, if you and a friend own a beach house as tenants in common, you each own 50 percent of that beach house. But who owns which half? It really doesn’t matter while both of you are alive, healthy, and getting along. You accommodate each other: each paying half of the expenses and receiving half of any income from rentals. You have an agreement about when each of you gets to use the house. If you should quarrel, however, problems can arise. You can’t demand your half of the house. Very likely, you and your ex-friend will have to sell the house – if you can both agree on the price and manner of sale.

In case you and your friend cannot reach any agreement, you can go to court and have the judge sell the beach house. This method is expensive, and odds are you won’t get the best price for the house. But when tenants in common can’t agree, courts are virtually the only recourse available.

If you can’t reach an agreement on who owns the beach house, and what one co-tenant is going to pay the other for their half, you are likely to end up in court with a judge ordering a sale. Other challenges can arise even if you and your co-owner get along fine. Issues arise if one of you wants to sell your half to a third party, or if one of you becomes mentally disabled.

You can sell your 50 percent interest in the beach house anytime you want, or you can give it away. Your other tenant cannot prevent either action. Even if you sell the house to your friend’s worst enemy, your friend cannot do anything about it! The real problem is getting someone to buy your part of the house. This new tenant will have to deal with your friend, and they, too, will have to agree on what to do with the beach house.

Disability can be a problem for both you and your co-tenant. If you are disabled to such an extent that you cannot manage your own affairs, and you have not done proper revocable trust planning, a probate court will likely control your part of the property. The probate court may demand that the property should be sold – and your other tenant will have little or no control over the whole process.

At your death, you can leave your share of the property to whomever you want. Without proper estate planning, it will go through probate, leaving your other tenant once again under the control of the probate court. You may leave your share to several heirs, making life that much more difficult for the other tenant.

3. Joint tenancy with right of survivorship is very common and very misunderstood. It is routinely used by spouses, but people who are not married use it too. Although similar to tenancy in common, joint tenancy has totally different results. If you own property in joint tenancy with right of survivorship:
1. You own all of it with someone else.
2. You can (a) give your interest away or (b) sell your interest.
3. You cannot leave your interest on death.

Joint property, also known as joint tenancy, is nothing but a planning pitfall. Although joint tenancy has been assailed for years by many estate planning experts, it remains – unfortunately – a very popular form of property ownership. Joint tenancy is a pitfall because you cannot control where such property passes after your death.

In joint tenancy, each person owns the entire asset, not a part of the asset. This legal fiction of two or more people owning 100 percent of the same asset is derived from the full name given to joint tenancy: joint tenancy with right of survivorship. “Right of survivorship” means that whoever dies last owns the property. The previous joint tenants merely had the use of the property while they were alive.

Joint tenancy property is “uncontrollable”. Even if a joint tenant intends to have his or her share pass to loved ones, the property is not controlled by the instruction in the joint tenant’s will or trust. Joint tenancy automatically passes to its surviving owners by operation of law.

Property that is owned in joint tenancy can be a trap, because the term itself has nice connotations. It implies “the two of us”, a partnership, a marriage of title as well as love. On the surface, at least, it appears to be the right way for people who care for each other to own property. It’s psychologically pleasing, which for many people is the real advantage of owning their property jointly.

As in many other latent problems, joint tenancy is easy and convenient. Odds are that when you were married (if you are), one of the first financial actions you and your spouse took was to open a checking or savings account. The clerk who helped set up your account put it in your joint names when you answered yes to, “Both names on the account?” The same is true of your first house or your first car. It seems that all of those involved (primarily clerks and salespeople), whether or not they knew what they were doing, took control of your estate planning and titled your property in joint tenancy.

For most people, the disadvantages of joint tenancy far exceed any advantages. Some of the more devastating pitfalls of joint tenancy are:

a. There is no control, and property may pass to unintended heirs.
b. There are no estate planning opportunities.
c. For married couples, probate is at best delayed, not totally avoided.
d. For non-spousal owners, unintentional gift taxes and death taxes can be generated.

(a) There is no control, and property may pass to unintended heirs.

Joint tenancy property passes to the surviving joint tenant and no one else, no matter what you do. If it is your intent to leave your property to your spouse and then to your children, joint tenancy is not for you. Joint tenancy provides no means of ensuring that your property will pass to whom you want. For example, if your spouse remarries, your children may inadvertently be disinherited. Or, against your wishes, your spouse may choose to disinherit some or all of your children after your death. If you and your spouse die together in an accident, significant questions may arise as to who is going to inherit your joint property.

While joint tenants are living, they can sell their interest in the joint property and they can give their interest away. In this respect, joint tenancy is similar to other forms of ownership. It is only on the death of a joint tenant that its unique features come into play. In Florida, joint tenancy between a husband and wife is called tenancy by the entirety. It works exactly like joint tenancy with right of survivorship, except that it is more restrictive. While both spouses are alive, the approval of both is necessary before the property can be transferred.

A joint tenant has the authority to take all the money from a bank account and has significant control over other types of property. This “control” can be dangerous, especially since a deceased tenant would have had no opportunity to leave any instructions restricting the use of the joint property. Even though property is titled in joint tenancy, the joint tenant who dies is presumed to own 100 percent of the property. As a result, the deceased tenant’s family not only loses the property (which passes to the surviving joint tenant), but also must pay all of the death taxes. Joint tenancy between non-spouses can create the worst possible tax scenario: full taxation on property one doesn’t even own.

(b) There are no planning opportunities.

What if your spouse or your children need assistance in managing the property you left them? Joint tenancy cannot help. What if you want to leave instructions for your loved ones as to how, when, and why your property is to be used? Joint tenancy offers no opportunity for instructions of any kind.

If you become disabled, your joint tenancy property may be tied up in a living probate while you desperately need it for your own or your loved ones’ care. If your spouse is disabled when you die, the probate court will “inherit” the joint tenancy property and determine how and when it is to be used for your spouse’s benefit.

(c) Probate is at best delayed, not totally avoided.

Despite the concerns already discussed, some advisors continue to recommend joint tenancy! Why? The major reason given is because joint tenancy property bypasses the entire probate process. But this is not entirely true.

With married couples, joint tenancy does not avoid probate – it only delays it. Because joint tenancy passes outside all will or trust planning, it does avoid probate – on the death of the first spouse. When the second spouse dies, however, there will be a probate. In situations where both spouses die together, there will be at least one probate and perhaps two.

(d) For non-spousal owners, unintentional gift taxes and death taxes can be generated.

When non-spouses create joint tenancy, they often create a gift tax as well. Frequently, an older parent designates a son or daughter as a joint tenant on bank accounts and/or other property. The moment this is done, the transfer of property is often considered by the IRS to be a gift, and if valued above $13,000 (in 2009) it will have to be reported to the IRS. In some cases, a gift tax may be immediately due.

When a non-spouse joint tenant dies, the surviving tenant gets the property. If a parent with three children makes one child a joint tenant (on the house, for example), then that child inherits the property, no matter what the parent’s will or trust says. The result is that (1) if the child is selfish, he or she may legally keep the entire property or (2) if the child is generous and shares the inheritance, he or she may have to pay a gift tax. Joint tenancy makes estate tax planning extremely difficult and may rob clients of the ability to reduce the estate tax burden imposed on their loved ones.

For many clients, the solution to all of these concerns is the creation of a revocable living trust, and the transfer of title to trust ownership rather than joint tenancy.

Many parents purchase life insurance, sign a will, or prepare a trust to ensure the well-being of their children.  Unfortunately, most life insurance proceeds are left outright to children and other beneficiaries without a single word of instruction. Read More→

Leaving property outright to a spouse seems like a loving act.  It is easy, natural, and comfortable.  It is also a mistake.  When assets are left outright to a spouse, the survivors may face the uncertainties of guardianship or probate, unforeseen expenses, and delays.  Such problems can be overcome through revocable living trust planning - when a marital trust is established.  This is a special sub-trust created on the death of the first spouse within that deceased spouse’s living trust. Read More→