Florida Asset Protection & Estate Planning Blog

IRS Rules No Tax Consequences to Severing Trust into Multiple Trusts

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Mon, 01 Feb 2010 15:51:00 GMT

In many cases, a person will provide in their estate planning documents for a testamentary trust to be established to provide a vehicle for the management and protection of the assets being left for children or grandchildren. Such a trust has many advantages, including the ability through a spendthrift provision to protect the assets from the trust beneficiaries creditors, to provide for professional management of the assets in the trust, to provide for an independent trustee who can prevent the beneficiaries from squandering their inheritance.

However, it is not uncommon in those situations for the different beneficiaries to have different circumstances, and thus different needs. In some situations the different beneficiaries will also be antagonistic towards each other, which might promote trust litigation between one or the other of them and perhaps the trustee.

In such situations it may be desirable for the trustee to separate the trust into multiple trusts so that each beneficiary's share can be dealt with by the trustee in a manner that more appropriately fits each beneficiary's needs - or avoids conflict and unnecessary litigation.

Until now, splitting such a trust into multiple trusts carried with it the concern that there may be income tax, or capital gains tax, consequences. However, in Private Letter Ruling (PLR) 201003015, the IRS ruled last week that the severance of a trust created for five grandchildren into five separate trusts (with terms identical to the initial trust) will not be deemed a sale or exchange under Cottage Savings Ass'n v. Commissioner, 499 U.S. 554 (1991). The severance will not cause income or gift tax consequences and the basis and holding periods of the trust assets will remain the same.

A private letter ruling can not be cited as legal support for another taxpayer's situation. It is specifically responsive to the facts and circumstances submitted to the IRS in the request for a private letter ruling. However, a private letter ruling does provides what is the current interpretation of the tax law by the IRS's general counsel's office. It offers guidance on how the IRS will treat other similar legal issues, and it is possible to structure the facts of a given situation to fit within the four corners of the facts in the PLR.

This ruling provides an opportunity for dividing a spendthrift trust or dynasty (generation skipping tax) trust into separate trusts for the individual beneficiaries of the trust, without negative tax consequences. It creates a number of desirable planning options to deal with specific circumstances that exists in many trust situations.

If you are the trustee or a beneficiary of an existing trust, and the separate individual beneficiaries have very different needs, you may want to consult with a Florida trust attorney to determine whether this private letter ruling may be applicable to your situation.

Preventing a Will or Trust Contest

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Sun, 31 Jan 2010 22:37:00 GMT

Over the past couple of years, as the recession has taken hold, we have experienced a higher level of controversy in estate settlement matters, including more will contests than usual and more than the average amount of trust litigation. Certainly, the economy has been a factor. With will contests and trust challenges though, more often than not, it is the emotions surrounding the death of a loved one, and family dynamics, that more often lead families into the courthouse over the interpretation of a will passage, or the meaning of a trust clause.

Emotions can run high at the death of a family member. If a family member is unhappy with the amount they received (or didn't receive) under a will or trust, he or she may contest the will or trust. Will contests can drag out for years, keeping all the heirs from getting what they are entitled to under the provisions of the will or trust. We've recently concluded a probate matter that has been open for more than six years. While it may be practically impossible to prevent relatives from fighting over your estate entirely, but there are steps you can take to try to minimize the opportunities for disagreement and to ensure your intentions are carried out.

There are numerous grounds upon which your will can be contested. Probably the most common is if a family member believes you did not have the requisite mental capacity to execute the will. Another common basis for challenging a will or trust is a claim that someone exerted undue influence over you. Occasionally, there are claims that someone committed fraud, or the will or trust documents were not signed properly. For more information about will contests and trust challenges, refer to our additional discussion of probate litigation and trust litigation found at our website.

The following steps can be taken to reduce the likelihood that a will contest is likely to succeed:

Make sure your will or trust is properly executed. The best way to do this is to have an experienced elder law or estate planning attorney assist you in drafting and executing the will. Wills need to be signed and witnessed, usually by two independent witnesses. Without a self-proof affidavit, in Florida, it is necessary to locate and obtain an affidavit from one of the witnesses. That can be quite difficult if the will or trust was signed in another state several years before the death. If a witness to the will cannot be located so the appropriate affidavit can be obtained, the will is deemed to be invalid, and your estate probably will be subjected to Florida's intestacy laws. For more information on the formalities for signing a will or trust, see our website.
Explain your decision. If family members understand the reasoning behind the decisions in your will, they may be less likely to contest the will. It is a good idea to talk to family members at the time you draft the will and explain why someone is getting left out of the will or getting a reduced share. If you don't discuss it in person, state the reason in the will, or leave a private letter for the persons who will be impacted by your decisions. This is especially true if you are making a distribution that is different that what would be "normal" given your family circumstances.
No-contest clause. In many states, one of the most effective ways of preventing a challenge to a will or trust is to include a "no-contest" clause (or "in terrorem" clause) in the will or trust. This will only work if you are willing to leave something of value to the potentially disgruntled family member. A no-contest clause provides that if an heir challenges the will and loses, then he or she will get nothing. You must leave the heir enough so that a challenge is not worth the risk of losing the inheritance. Florida law does not recognize no-contest clauses. Though you may prevail upon your elder law or estate planning attorney to include such a clause in your will or trust, it will not be enforced by the Florida probate courts.
Prove competency. One common way of challenging a will or trust is to argue the deceased family member was not legally competent at the time he or she signed the will. You can try to avoid this by having the attorney drafting the will test you for competency. This could involve being examined by a psychiatrist or as simple as answering a series of questions. In Florida, a person may be legally competent to sign testamentary documents, but may still suffer from dementia, or other signs of incompetence, if the will or trust is signed during a "lucid moment." Obviously, if such a lucid moment is necessary, it should be well documented.
Videotape the will signing. A videotape of the will signing allows your family members and the court to see that you are freely signing the will and makes it more difficult to argue that you did not have the requisite mental capacity to agree to the will. Several years ago, we were able to avoid a will challenge because we videotaped the meeting where the will maker signed the will, and through the course of the videotaping and the discussion surrounding the signing of the documents, it was completely clear that the will maker was fully aware of who his natural heirs were, what his objectives were, and that he knew exactly what he was doing.
Remove the appearance of undue influence. Another common method of challenging a will is to argue someone exerted undue influence over the deceased family member. Even though undue influence is very difficult to prove in Florida probate courts, it still is a good idea to take appropriate action to avoid even the appearance of undue influence. For example, if you are planning to leave everything to your daughter, who is also your primary caregiver, your other children may argue your caretaker daughter took advantage of her position to influence you. To avoid the appearance of undue influence, you should not involve any family members who are inheriting under your will or trust in the drafting of your will or trust. Family members should not be present when you discuss the will or trust with your attorney or when you sign it. To be totally safe, family members shouldn't even drive you to the attorney.
Actually disinherit family members who are to receive nothing. Under Florida law, a beneficiary of a will or trust who receives only one dollar is nonetheless a beneficiary of the estate. As a beneficiary that person is entitled to notice of all the activity taking place within the estate, as well as access to accountings and financial information. To avoid giving those persons you want to disinherit the rights to such information, you should specifically disinherit those individuals, and not leave them a dollar, or anything else. A simple statement that you are disinheriting the family member or other heir, "for your own reasons" is sufficient. If you want to detail the reasons, you have that right, but it is not necessary. By specifically disinheriting the family member, you may limit some of their access to information, and reduce the likelihood of a will contest or trust challenge.
Choose appropriate fiduciaries. Exercise care in choosing fiduciaries (estate personal representatives, executors or trustees) for your estate or trust administration. Putting one child "in charge" of the other child's inheritance, is almost a sure prescription for trouble between the siblings, especially if there has been sibling rivalry in the past. Having the children acting as co-fiduciaries could also result in the undoing of your planning, particularly if you have provided for protective trusts for children or grandchildren. The co-fiduciary children are likely to decide that "I'll give you all of yours if you'll give me all of mine." Also, be leery of appointing as executors or trustees those who may have a hidden agenda for your beneficiaries. We recently were retained to and did accomplish the removal a long time family friend and advisor as the fiduciary in an estate, at significant cost to the estate, where his actions toward the beneficiary were anything but beneficial.
Treat Florida Homestead Properly. Florida, and just a small handful of other states, have some very special rules with regard to the disposition of your homestead if you have a surviving spouse, or surviving minor children. Be sure that proper consideration is given to the disposition of the Florida homestead property so that there is no basis for challenging the will or trust for a violation of Florida's homestead provisions.
Florida's Elective Share. Florida has a statute that precludes one from totally disinheriting a spouse. It allows for the surviving spouse to "elect" against the provisions of the will or trust, and choose to take a stated percentage of the deceased spouse's estate regardless of what is provided in the will or trust. The elective share is taken from the "augmented" elective share estate - which often is more than the probate estate. If not properly provided for in the will or trust, the surviving spouse's challenge could upset other aspects of one's estate plan. Provisions for the surviving spouse's elective share should be included to avoid a challenge on that basis.

If proper care and consideration is put into the drafting and execution of a will or trust, you can reduce the likelihood that someone will challenge that will or trust. Unfortunately, in the American system of jurisprudence, it is impossible to totally eliminate the possibility for someone to challenge such documents.

Business Owners and Corporate Compliance

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Mon, 18 Jan 2010 20:13:00 GMT

Many business owners are so wrapped up in the day to day survival activities of maintaining and growing their business, they often overlook some of the fundamental needs that every business owner must deal with, if the business is to have long term success.

I will be presenting some important information, as a guest of my good friend and SCORE volunteer, Linda Nottingham, on February 25, 2010 at the SBA North Florida District Office at 7825 Baymeadows Way, Suite 100B, Jacksonville, FL 32256.

The topic will be "Corporate Compliance . . What you need to know as a business owner." We'll help show you what you need to know to determine if your legal entity is in good order and being properly maintained; how to avoid having "ordinary and necessary" business expenses disallowed in an IRS tax audit, and what steps you need to take to protect your "corporate veil" to avoid subjecting personal assets to the payment of business liabilities, among other things. If you would like to reserve a seat, call Donna Padgug at (904) 443-1971.

Estate Planning Challenges for Business Owners

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Mon, 18 Jan 2010 17:03:00 GMT

Over the past couple of years, I've been involved with the Jacksonville Women's Business Center and the Jacksonville Chamber of Commerce Small Business Center as a sponsor, presenter and mentor. I have found it to be a wonderfully satisfying experience and quite rewarding to help others grow their small businesses.

Among the many things in which I participate, I often have questions and about which I provide information to small business owners involves business succession planning and buy-sell agreements.

If you are a business owner you probably have experienced at least some, if not all of, the following: Are you the first one to arrive in the morning, as well as the last one to leave in the evening? Have your employees ever taken home paychecks while you sacrificed your paycheck to the bottomless pit called accounts payable? Have you ever paid your mortgage on a credit card?

Over the years, you probably have worked through physical, mental and financial pain that would have caused other folks to close shop and look for a job elsewhere. As a business owner you have survived untold challenges. If your business is a family business, then you face some additional unique challenges to protect and preserve your business, your wealth, and your family.

Some Interesting Family Business Statistics

It would be an understatement to say that family businesses are the backbone of the American economy. Approximately 90 percent of all businesses in this country are either family-owned or family-controlled. They come in all shapes, sizes and colors, representing all sectors of our economy. From agriculture, to services, to technology, to manufacturing, family businesses generate an estimated one-half of the U.S. Gross National Product and pay half of all wages earned in this country. Not all family businesses are traditional small businesses either. Interestingly, about one-third of all businesses included in the Fortune 500 are family businesses. But not all of the family business statistics are rosy.

Family businesses do not tend to outlive their founders. At any given moment, 40 percent of family businesses are in the process of transferring their ownership. Unfortunately, two-thirds of all initial transfers fail. Of the one-third that survives an initial transfer, only one-half will survive a second transfer.

Why such a dismal success rate? The reasons are as varied and unique as the businesses and business owners themselves. Nevertheless, many of the failed transfers can be traced to three causes: people, taxes and cash.

Business Succession and the Family

The family element in every family business can mean the difference between its success or failure during the transfer process. Common triggering events include the retirement, disability or death of the business owner. Tough questions must be asked and answered. Otherwise, a business that took you decades to build can be destroyed overnight. For example, who will run the business after you? Will it be your spouse, one of your children or a non-family member key employee? If not your spouse, will your spouse be financially dependent on the business or financially independent of the business? What arrangements have you made for an alternative inheritance for your business-inactive children? Have you in-law proofed your estate? Thinking ahead to the second-generation transfer of your business, what provisions have you made to encourage thrift and industry among your grandchildren?

Aside from the people planning issues, what effect will estate taxes have on the survival of your business?

Estate Tax Uncertainty?

Despite the fact that there is currently no estate tax for 2010, what if Congress fails to take action, and in 2011 the estate tax reverts to an exemption from taxes of only $1 million, and a maximum estate tax rate of 55%?

The only certainty about the federal estate tax is its long-term uncertainty with each change in Congress and the White House. Additionally, many states have imposed their own estate taxes, independent of any federal estate taxes. Accordingly, careful monitoring of the economic, political and legal climate is required. Why? Without proper estate liquidity planning, your family may have to sell the family business just to meet an estate tax cash call (just nine months after the date of death).

The Need for Liquidity

Unless you carefully coordinate your financial plan with your estate plan and your business succession plan, there may not be enough cash to fund your ultimate objectives. An appropriately funded estate plan can help meet all of your people planning objectives and provide liquidity for estate taxes (and business debts). Life insurance, owned in the proper amount, type and manner, may be effectively used to fund such liquidity needs.

Buy-Sell Financing

True or false: Most family business owners want their businesses to be liquidated when they retire, become disabled or die. If you answered false, then you are correct. Next we will talk about the fundamental key to the survival of a family business – a Buy-Sell Agreement (BSA).

Buy-Sell Agreements

A BSA is a lifetime contract providing for the transfer of a business interest upon the occurrence of one or more triggering events as defined in the contract itself. For example, common triggering events include the retirement, disability or death of the business owner. An interest in any form of business entity can be transferred under a BSA, to include a corporation, a partnership or a limited liability company. Also, a BSA is effective whether the business has one owner or multiple owners. As a contract, a BSA is binding on third parties such as the estate representatives and heirs of the business owner. This feature can be invaluable when the business owner wants to ensure a smooth transition of complete control and ownership to the party that will keep the business going. Subject to certain Family Attribution Rules under Internal Revenue Code § 318, a BSA can help establish a value for the business that is binding on the IRS for federal estate tax purposes as provided under Internal Revenue Code § 2703.

Importance of Buy-Sell Agreements

To illustrate the importance of a buy-sell agreement requires only that I look at our currently active probate files. In those files is the case of Jim (not his real name). Jim and his wife came to us through a referral from his financial advisor about a year and a half ago. Our review of his estate matters revealed that he owned 50% of a corporation through which his business was conducted. He had one partner who owned the other 50% of the corporation. Their business provided services and manufactured goods to a major industrial operation. Jim indicated that his business was worth $10 million, but because of the income it generated, that neither he nor his partner would want to sell it for that amount, but would require something more than that. There was no buy-sell agreement in place, and no business succession plan provide for the death or disability of either of the principals of the business.

Jim agreed to discuss with his partner a business succession plan for the business and the terms of a buy-sell agreement.

Approximately four (4) months after Jim and his wife signed their basic estate planning documents, his wife called to notify us that Jim had been diagnosed with brain cancer. He died four months later, without having reached an agreement with his business partner regarding the business succession plan and the terms of the buy-sell agreement.

We are now probating Jim's estate. After almost a year of negotiations, and a threat by the former partner to close the business and reopen it elsewhere, Jim's wife has agreed to take less than $1 million for Jim's interest in the business -- less than 20% of its minimum fair market value before his diagnosis!

Three Types of Buy-Sell Agreements

A BSA is commonly structured in one of three general formats: an Entity BSA, a Cross-Purchase BSA or a Wait-And-See BSA. Under an Entity BSA, the business entity itself agrees to purchase the interest of a business owner. Conversely, under a Cross-Purchase BSA, the business owners agree to purchase one another’s interests. The Wait-And-See BSA gives the entity a first option to purchase the interest before the remaining business owner(s).

In addition to these three general formats, a One-Way BSA may be used when there is one business owner and the purchaser is a third party. The selection of the appropriate BSA format is critical for a variety of tax and non-tax reasons beyond the scope of this discussion. However, no BSA is complete without a proper funding plan. Like a beautiful automobile without fuel in the tank, a BSA without cash to fund the purchase is going nowhere (except to the trial lawyers, perhaps).

Funding a Buy-Sell Agreement

Common options to fund the purchase obligation under a BSA include the use of personal funds, creating a sinking fund in the business itself, borrowing funds, installment payments and life insurance. Of these options, only the life insurance option can guarantee complete financing of the purchase from the beginning. Accordingly, a proper BSA will include both disability buy-out insurance and life insurance. Since the health of the business owner determines their insurability, any delay in acquiring appropriate coverage could be fatal to the success of the BSA and, with it, the survival of the business itself. Or, as in Jim's case, a quite significant loss of value for one's family in the event of death or disability.

Bottom Line

The bottom line is clear. Without a properly funded, well thought out, buy-sell agreement, your family business, or any other closely held business, will likely not survive you or your disability. If you are one of the many business owners without a business succession plan, with a properly funded buy-sell agreement, you should immediately discuss with your team of advisors (your CPA, your life insurance agent, and your estate planning attorney) the appropriate terms for such a plan for your own business.

Obviously, we at The Coleman Law Firm are available to assist in such planning, and appreciate the value that is derived from having your advisor team work together to devise a plan that most completely meets your specific, and individual, needs.

Roth IRA Conversion in 2010 - Right for You?

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Mon, 11 Jan 2010 15:26:00 GMT

Changes in federal tax law involving the Roth IRA now make this retirement savings plan available to wealthier individuals. There may be good reason for you to consider converting your traditional IRA to a Roth IRA. We briefly discuss some of the factors to consider in determining whether to convert your existing traditional IRA to a Roth IRA so that you can discuss them further with your estate planning lawyer or attorney, or financial advisor. Each individual's circumstances will determine whether converting a traditional IRA to a ROTH IRA is a good idea for you.

What are the benefits of a traditional IRA? A traditional IRA allows you to contribute pre-tax dollars to your account. You pay taxes when you take distributions from the retirement account (on the original contribution, plus any increase in value). The idea is, you will be in a lower tax bracket when you are retired, and taking distributions, than you are as an employed person paying in to the account. The downside to the traditional IRA is that after you reach age 70½, you must take a minimum required distributions from the IRA each year. The amount of the distribution is calculated annually and is based on the value of your retirement account and your life expectancy. If you are taking mandatory distributions each year, that will reduce the amount remaining in the account to pass along to your heirs when you die. When your heirs take funds from the IRA after your death, it is taxable income to them, in the year the funds are withdrawn.

It has long been the case that your spouse can inherit your IRA and continue to take annual distributions based on his or her own life expectancy. Other family members often had to cash out the account in five years, or fewer. Rule changes enacted in 2006 made it easier to pass along the remaining money in your IRA to people other than your spouse – a non-marital partner, or your kids, for example – and allow the beneficiary to take distributions over a longer period of time.

Why would I want to create a Roth IRA, when I already have a traditional IRA? A Roth IRA is funded with after-tax dollars. This means that as the account increases in value over the years, it increases tax-free. Unlike the traditional IRA, there are no mandatory distribution requirements for the account owner – meaning that more money remains in the account to pass along to your heirs. Although distributions will be mandatory for your heirs, the distributions are tax-free. If you have other sources of income, and you plan to use your retirement account mostly as a vehicle of passing money along to your heirs, rather than to fund your own retirement, a Roth IRA may be preferable to a traditional IRA.

Why are you telling me about a Roth IRA now? Until now, the Roth IRA has only been available to taxpayers whose annual income is less than $100,000. Effective January 1st, taxpayers whose income exceeds $100,000 can convert their traditional IRAs to Roth IRAs. It will be necessary that you pay the income tax on the account with the conversion. However, if you make the conversion in 2010, you can spread out the payment of the income tax liability that arises from the transfer over two years.

Why might converting from a traditional IRA to a Roth IRA be a desirable option?

If you believe that the income tax rate will only increase in the future, you might decide that it makes sense to pay the tax now, rather than pay it at a higher rate twenty or thirty years down the road.
If you have sufficient wealth that you don't think you will drop into a lower tax bracket upon retirement – or if you plan to leave your retirement account to your kids and they will be in a higher tax bracket – it might make sense to pay the tax now.
If your traditional IRA has suffered a big decline in value over the last couple of years (and whose hasn't?), you may find it more appealing to convert it to a Roth IRA and pay the income tax now, in the hope that the account will increase in value (tax-free) over the coming decades.

You are making a bet, though, that Congress won't decide to begin taxing the capital gains on the Roth IRA. You also will need to have money available to pay the income tax on the conversion – preferably, money coming from a source other than your traditional IRA.

What factors should I consider in making the decision? Here are a few:

The availability of non-IRA funds to pay the taxes now;
Your willingness to pay taxes now, rather than later;
Whether you are already taking distributions from your IRA;
When you plan to retire; and
Whether you intend to live off your retirement account or pass it on to your heirs.

There are rules about making the conversion (or, having made the conversion, undoing it) and the timing of paying the taxes for the conversion (a lump sum versus installments over two years). There are penalties for withdrawing funds from a Roth IRA within the first five years of establishing an account.

Regardless of whether you have a traditional or ROTH IRA, the value of the IRA will be included in your estate for estate tax purposes. If you will need your traditional IRA to provide your own retirement income, the advantages of converting may not be as great.

For all of these reasons, we encourage you to have a candid conversation with your estate planning attorney or lawyer, or your financial advisor, to see if converting your traditional IRA to a Roth IRA is right for you. If you would like a very detailed discussion of the pros and cons of converting your traditional IRA to a ROTH IRA, the information found in Ed Slott's article on ROTH IRA conversions in Financial Planning magazine is fairly comprehensive.

Estate Planning After "Repeal" of the Federal Estate Tax

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Tue, 05 Jan 2010 14:34:00 GMT

From its inception, the 2001 tax act was scheduled to repeal the federal estate tax and generation skipping transfer tax (GSTT) for one year beginning January 1, 2010. This should come as no surprise. What is surprising, however, is the fact that the 2001 tax act has now played out and repeal, at least temporarily - and unless reinstated retroactively - is upon us. This post explores how we got here (which may be instructive as to what will happen in the future) as well as some of the planning implications of no federal estate tax or GSTT for at least some part of 2010.

How Did We Get Here?
On June 7, 2001, President George W. Bush signed into law the much-heralded Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), designed to provide significant tax relief, including "permanent" relief from the federal estate tax (with its then $675,000 exemption and maximum 55% tax rate).

As we know, EGTRRA steadily lowered the maximum estate tax and GSTT rate to 45%, while increasing the exemption amounts to $3.5 million in 2009 and eliminating federal estate tax and GSTT altogether in 2010. However, as a result of a Senate rule that limits laws with a negative fiscal impact to 10 years (the so-called Byrd Rule), from inception EGTRRA contained a "sunset" provision. Under this provision, as of January 1, 2011, the law is scheduled to revert back to pre-EGTRRA law as if EGTRRA never existed. In other words, the federal estate tax and GSTT exemption will become $1 million (it was scheduled to increase under prior law) with a maximum rate of 55%.

As a result of the Byrd Rule, we should accept with caution any EGTRRA interpretations that suggest tax savings beyond 2010.

For the year 2010, the estate tax and GSTT are replaced by a "modified carryover basis" system. The impact of modified carryover basis is discussed more fully below.

What Will Congress Do Now?
No one knows with certainty what Congress will do to remedy this situation but several key Congressmen have stated publicly that they will attempt to pass estate tax legislation early in 2010. One of them, Senator Max Baucus, Chairman of the Senate Finance Committee, has said that swift action is necessary to prevent "massive, massive confusion."

Furthermore, many in Congress have expressed the desire to make such legislation retroactive to January 1, 2010. If Congress purports to make these tax charges retroactive to January 1, there are sure to be numerous lawsuits over the constitutionality of such retroactivity and, in all likelihood, these challenges would not be resolved until after years of litigation culminating in a Supreme Court decision. Where would that leave someone who dies in the interim?

It is not a foregone conclusion that Congress can make the estate tax legislation retroactive to January 1, 2010. Chief Tax Counsel to the House Ways and Means Committee, John Buckley, has opined publicly that reinstituting the estate tax retroactive to January 1, 2010, would be unconstitutional.

Cynics, however, note that these same Congressmen were unable to pass a one-year patch that would have eliminated the confusion in the first place. They also suggest that it is in the best interest of both Democrats and Republicans to do nothing and let EGTRRA sunset - and their argument has gained traction recently.

The argument is as follows: Democrats have incentive to do nothing because this law was passed by a Republican Congress and signed by a Republican President - they have no responsibility for the insanity caused by the sunset. Republicans, alternatively, are incentivized to do nothing because they have steadfastly argued for total repeal of the "death tax," and this cry - at least in 2001 - resonated with the American people. Their argument is that Democrats had the opportunity to permanently end the "death tax" and chose not to. In what potentially will be a significant mid-term election, many in Congress will likely use their position on the "death tax" in an attempt to ensure reelection.

Given the above factors, the most likely outcome for the estate tax will depend upon the other pressing priorities on Capitol Hill.

Modified Carryover Basis
Under our current estate tax system, subject to some exceptions, assets owned at death receive a basis "step-up" to their fair market value at the time of death. Therefore, if someone dies owning Walmart stock that he or she bought for $10,000 many years ago, for example, the beneficiaries could sell the stock at its fair market value of, say, $10 million, and pay little or no income tax. The only tax the beneficiaries would have to pay would be on the difference between the sale price and the fair market value at death. (Of course, the stock would also be subject to estate tax at the decedent's death.)

Under EGTRRA, along with repeal of the estate tax and GSTT in 2010, a beneficiary receives property with an adjusted basis equal to the lesser of the decedent's basis or the asset's fair market value on the decedent's date of death. Thus, EGTRRA eliminates the automatic "step-up" to the date of death value but retains the "step-down" for depreciating assets.

Modified carryover basis will impact far more decedents than those who would have been impacted by the estate tax, 70,000 versus 6,000 according to some estimates.

To offset this loss of the step-up in basis, EGTRRA provides that the executor (or other person responsible for the decedent's property) may allocate a $1.3 million "aggregate basis increase" on an asset-by-asset basis up to the particular asset's fair market value at the date of the decedent's death. Assets left to a spouse may receive an additional $3 million "spousal property basis increase," also asset-by-asset, up to the particular asset's fair market value at the date of the decedent's death.

Unless one can affirmatively prove the basis of an asset, the IRS presumes that the asset has a basis of the property's approximate fair market value on the date it was acquired by its last owner. Therefore, it is absolutely critical that you keep adequate records for all assets.

It is worth noting that Congress instituted modified carryover basis one other time in history and repealed it retroactively because of the difficulty in administration.

Lifetime Powers of Appointment
Under current law, for purposes of the basis step-up, a surviving spouse owns property in a marital trust over which that spouse has a lifetime or testamentary power of appointment. However, for purposes of the $3 million spousal property basis increase, only a QTIP trust is eligible and EGTRRA treats property in a QTIP trust over which the surviving spouse has a lifetime power of appointment as not owned by that spouse. Thus, if the surviving spouse has a lifetime power of appointment over the QTIP trust the executor (or other person responsible for the decedent's property) cannot allocate the spousal basis increase to marital trust property. Alternatively, the executor can allocate the spousal property basis increase to QTIP property over which the surviving spouse has only a testamentary power of appointment.

Each person should review their own estate planning documents, with their estate planning team, especially carefully for all marital trusts established by those documents, to ensure availability of the spousal property basis increase.

The Impact on Existing Estate Plans

Residuary Marital Trust Formula Funding Clauses
Under a typical living trust or will, the document creates at least two trusts, a credit shelter (aka bypass or Family) trust and a marital trust. Often, the living trust or will language divides the decedent's property into the two trusts through what is known as a residuary marital trust formula funding clause, as follows: the amount of the decedent's property that will pass to the credit shelter trust equals the "maximum amount that can pass free of federal estate tax;" the balance of the decedent's assets pass to the marital trust.

If the individual created this estate plan when the federal exemption was significantly lower, and in particular if the person dies in 2010, this common estate planning language will cause the unintentional over-funding of the family trust and under-funding of the marital trust. Where the family and marital trusts contain identical beneficiaries and dispositive provisions, this over-funding of the family trust and under-funding of the marital trust will have no significance. However, if the family and marital trusts contain different beneficiaries (which is often the case with blended families in second marriages) and/or different dispositive provisions, this may cause unintended and undesirable consequences for you and your family.

You and your estate planning team should review all estate plans created more than five or so years ago to ensure that each plan meets the your own current planning objectives. You and your estate planning team should also review every estate plan created before 2001 to review the formula-funding clause.

For example, with second or subsequent marriages, and in particular where there are children from a prior marriage, individuals often limit the surviving spouse's rights to the income from the marital trust, while the children from the prior marriage are often the beneficiaries of the credit shelter trust. If someone dies in 2010, all of that person's assets will pass to the credit-shelter trust, and the marital trust - i.e., the surviving spouse - will receive nothing! This is certainly not what was wanted and it will not provide the state's statutory minimum to the surviving spouse to avoid a potential elective share dispute. With few or no assets left to the surviving spouse, he or she may resort to a lawsuit against the trust or estate for the statutory minimum, thereby increasing legal fees and wreaking havoc with the estate plan.

Your estate planning team can help you prevent this problem by modifying the will or trust language to ensure that assets are available for the surviving spouse.

Conclusion
Since most estate planners did not anticipate EGTRRA playing out into 2010, many people's estate plans fail to take into consideration the lack of estate tax and its replacement, the modified carryover basis. As the above discussion demonstrates, the key is flexibility and ensuring that an individual's estate plan contains enough flexibility to accomplish their goals under changing circumstances.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this material was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer's particular circumstances.

Qualifying for Medicaid Benefits and Preserving Assets for Family - The Personal Care Contract

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Tue, 29 Dec 2009 16:55:00 GMT

A personal services contract, or a caregiver agreement, is an agreement between two persons, typically a parent and adult child, in which the adult child agrees to provide various personal services to the parent for a period of time typically measured (but not necessarily) by the parent's life expectancy pursuant to the applicable mortality tables.

The personal services contract allows the parent to appropriately spend down assets in a manner that does not create any penalty with respect to the parent ultimately qualifying for Medicaid benefits, usually for the institutional (nursing home) care program administered by Medicaid.

Whenever a personal services contract or a caregiver agreement is utilized in a Florida Medicaid or Veterns Administration ("VA") Planning case, there are always questions regarding income taxes. When, and to what extent, does the care recipient get to deduct the payment or payments? When, and to what extent, does the caregiver child have to recognize taxable compensation or income?

Section 61(a) of the Internal Revenue Code ("IRC") defines "gross income" as compensation for services... . Thus, it is clear that when a caregiver child is paid on a monthly basis, with the actual compensation following the dates of service, the caregiver child will have to recognize taxable compensation to the extent of what he or she receives in a calendar year.

How do the income tax consequences change when the parent care recipient wants to pre-pay for all future services? The Florida Medicaid Program and the VA Program allow an applicant for Medicaid Institution Care Benefits to reduce his or her spend-down amount by a lump sum payment for future care services - accelerating the time that an individual can qualify for Florida Medicaid or VA benefits institutional care benefits, and preserving assets for the family's use in providing continuing care for the care recipient. But what if the caregiver child does not have a good history of managing money, and the parent care recipient wants to protect the compensation plan from advance spending by the caregiver child by utilizing an immediate annuity as part of the payment structure; does the immediate annuity provide an effective solution? It is my opinion that it does!

To illustrate, assume that Mary Contrary is age 77, and resides in an assisted living facility. Her daughter, Emily Dogood, assists her twice a week by providing three hours of personal care needs per visit. The personal care needs include bathing assistance, laundry services, medication management, and transportation to doctor's appointments. Based on comparable services in the community, Emily's services are reasonably priced at $16.00 per hour. Over her Medicaid life expectancy, 10.96 years or 131.52 months, Mary expects to receive $54,496.00 worth of personal care services from her daughter, which equals $416.00 per month.

With Emily not having a good money management history, Mary was concerned that Emily would pre-spend the compensation if she received a $54,496.00 lump sum payment. After receiving some advice from her Jacksonville Florida Elder Law attorney, Mary decides to purchase an immediate annuity for $49,250.00, which provides 131 guaranteed monthly payments of $416.00. Mary is the owner, annuitant, and payee of the annuity. After the caregiver agreement is executed, Mary transfers the ownership of the immediate annuity to The Coleman Law Firm, as escrow agent, pursuant to the terms of the personal services contract, or caregiver agreement, and the accompanying escrow agreement. For convenience purposes, The Coleman Law Firm would immediately change the monthly payee from Mary to Emily.

What are the income tax ramifications of the proposed transaction? Is Emily required to recognize taxable income/compensation to the extent of the value of the immediate annuity? We believe the answer is "no." Emily will only need to recognize taxable income/compensation to the extent that she receives payments in a given calendar year. Mary has "spent down" the cost of the annuity (i.e., $49,250.00) and is positioned to qualify for Medicaid or VA benefits at a much earlier time than she othewise would be.

Our opinion is supported by the following Tax Court and Federal Circuit Court cases of Sproull v. Commissioner, 16 T.C. 244 (1951), affd. 194 F.2d; Centre v. Commissioner, 55 T.C. 16 (1970); Minor v. United States, 772 F.2d 1472 (9th Cir. 1985); and Childs v. Commissioner, 103 T.C. 634 (1994). See IRC Section 83. Taken together, these cases stand for the proposition that the person who performs personal services is not required to include in his or her gross income the fair market value of any property, until he or she has an actual beneficial interest in such property, to the extent that he or she can transfer the property without a substantial risk or forfeiture. In Emily's case, she has no beneficial interest in the immediate annuity, except to the extent that she receives actual monthly payments.

If you may have a parent who is facing the prospect of a skilled nursing home confinement, you may want to explore whether a personal services contract may be appropriate for your family's circumstances. If this or other Medicaid planning is of interest to you or your family members, please contact the Coleman Law Firm, a Jacksonville Florida Elder Law Firm, to schedule a consultation to discuss how your family member may benefit from Medicaid qualification, or the use of a personal care contract.

Senate Lets Estate Tax Expire - That Means Higher Capital Gains Taxes for Less Wealthy Heirs

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Wed, 23 Dec 2009 14:47:00 GMT

The estate tax expires next week!! Hurray!! Hurray!! Right?

Not for the less wealthy heirs - those who will inherit from relatives with less than $3.5 million per person, or $7.0 million per married couple.

Since it appears that Congress has failed, and will fail, to act before January 1, 2010, the estate tax goes away for the calendar year 2010. That's reason to celebrate for a few thousand very wealthy families. But, there are tens of thousands of taxpayers of more modest means who will pay capital gains taxes on inherited assets that are inherited during the period for which there is no estate tax. The personal representatives or executors of those estates will also face additional and confusing administrative burdens.

That's because for the year 2010, the estate tax is replaced with a 15% capital gains tax on inherited assets that are later sold. Based on the current law that expires December 31, 2009, someone inheriting property when someone dies gets a "step up in basis" for the property inherited. Thus, the value of the property for determining the capital gains tax to be paid upon the sale of the property is calculated based on the value at the time it is inherited -- not when it was originally bought by the decedent.

The law that is eliminating the estate tax effective January 1, 2010, also eliminates the step-up in basis rules, for all but a few people. So, people who inherit estates in 2010 will have to pay capital gains taxes on any assets sold based on the original price paid for the asset, after an exemption for the first $1.3 million in capital gains (plus an additional $3 million for assets transferred to a surviving spouse).

Let's suppose that your parent dies and leaves you a home valued at $1.0 million and a stock portfolio purchased over the past 25 years at different times. Upon your parent's death, if you decide to sell those assets immediately upon your parent's death, you would have no capital gains tax on the sales, based on current law. However, if your parent dies on January 1, 2010, the new provisions require that you calculate capital gains based on the value of the home and the stock portfolio based on your parent's purchase price for the home and each of the stocks in the portfolio, not when your inherited the assets. Not only will that be a very expensive tax bill, the time you, or the executors of your parent's estate, will spend trying to ascertain the original price your parent paid for everything will be outrageous, and potential impossible in many cases.

Congress could have avoided this fiasco by extending the current estate tax for another year, or two, or permanently. Chief Tax Counsel for the House of Representatives Ways and Means Committee has estimated that extending the current estate tax law would affect about 6,000 estate. However, 71,400 estates will face potential new capital gains taxes if the estate tax expires on December 31, 2009, as it appears will now happen. Of those 71,400, tax counsel estimates that 62,500 of those estates would not have capital gains taxes or estate taxes if the 2009 law was extended. According to the Center on Budget and Policy Priorities, farms and business estates will constitute a disproportionately large share of those incurring the new tax.

The House of Representatives passed a bill in early December extending the 2009 estate tax rules permanently. (An exemption for the first $3.5 million owned by an individual, $7.0 million for a married couple, and a tax rate of 45% on the amount of an estate exceeding those limits. The Senate's Democrats have indicated a desire to pass a companion bill in the Senate, but so far have been blocked by the Republicans who want a lower rate (35%) and a higher exemption amount ($5 million per person, $10 per married couple).

What Happens With a Retroactive Change

Many in the Senate, including Senate, including Finance Committee Chairman Max Baucus (D-MT), have indicated they will pass the legislation necessary to extend the current rules sometime in 2010, on a retroactive basis, effective January 1, 2010. That means for individuals who die between January 1 and the passage of the legislation, the estate tax rate will go from 0 to 45% upon the retroactive application of the legislation. There is sure to be lots of litigation and uncertainty. Sounds pretty messy. Forbes Magazine recently provided an overview of just how messy it could get. To read what Forbes says about the situation, click here. Whatever happens in 2010, there is sure to be some uncertainty over the estate tax. We'll keep you posted on our government at work on the estate tax issues.

For more information on the impact of the apparently temporary disappearance of the estate tax, you can review Kiplinger's "FAQs on the Death of the Estate Tax."

Asset Protection Planning or Estate Planning - Which has Priority?

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Fri, 30 Oct 2009 10:28:00 GMT

Over the past few weeks I've had the opportunity to work with a relatively successful young couple who have accumulated fairly significant assets, but who continue to be very concerned about the direction of the economy. They have expressed a desire to structure their financial affairs in a way that will protect them from potential future sources of liability.

Prior to being referred to me, they worked with a Florida estate planning attorney who provided them with very good estate planning, including the proper design and implementation of a revocable living trust. The buik of their assets are titled to their joint revocable living trust, as is completely proper and appropriate for meeting typical estate planning objectives involving the management of their assets in the event of an incapacity of one or both of them, avoiding probate, and providing for the management and distribution of their assets at death.

As is often the case, their asset protection objectives conflict with their estate planning goals. That means the things that have accomplished through their properly designed estate plan need to be revisited and modified to accomplish their estate planning goals.

The main issues that create inconsistencies between good estate planning and good asset protection planning revolve around the use of statutory exemptions and titling of assets.

Florida Statutes, Chapter 222, provide that certain assets are exempt from creditors claims. Assets that are listed in the statutes are not subject to satisfying a judgment that is obtained against the owner of the assets. Assets that are listed in Chapter 222, include, among other, retirement accounts (including IRAs - both traditional and ROTH, SIMPLE IRAs, SEP IRAs), annuities, the cash value of life insurance (protected from creditors of the owner of the life insurance policy), death benefits of a life insurance policy, a wage account, disability benefits, and certain amounts of personal property.

In addition to the statutory exemptions, Florida recognizes another "super" exemption. The Florida Constitution provides that one's home is not subject to the claims of creditors (other than consenual liens and taxes), without limitation of value. [Note: The federal bankruptcy code does provide for some limitation on the homestead exemption in certain circumstances.]

What do statutory exemptions accomplish in simple terms? If a person has a judgment entered against them as a result of an automobile accident (not otherwise covered by liability insurance), premises liability because of their ownership of real property, professional negligence or malpractice, a deficiency judgment from a mortgage foreclosure, or any other reason, the creditor who owns the judgment can not seize statutorily exempt assets from the judgment debtor. So, for instance, if your mortgage company obtains a judgment against you for a deficiency in your mortgage foreclosure, and all you own is annuities, the mortgage company can not seize your annuities to satisfy the judgment. You get to keep your annuities and can receive the income or principal distribution from the annuity even though the judgment has been obtained and recorded and constitutes a lien on any property you own.

Another area of significance regarding inconsistencies between asset protection planning and estate planning involves titling of assets. Proper estate planning often dictates that assets be owned separately by husband and wife for potentially many reasons. If the couple has a taxable estate (currently an combined estate in excess of $3.5 million), separate ownership is necessary to utilize both spouse's exemptions from estate taxes. In blended families, separate ownership may be necessary to ensure that each spouse's estate, after the death of the 2nd spouse to die, goes to that spouse's heirs (perhaps children from an earlier marriage).

If asset protection is required for whatever reason, the separate ownership of those assets creates the risk that assets may be lost to future judgment creditors. How does that happen?

Florida law recognizes a form of ownership called "tenancy by the entireties." We'll call it TBE. TBE is a special form of ownership that treats the asset as being owned by the marital unit, comprised of the husband and wife, not the individuals who happen to be the husband and wife. That means a judgment creditor of one spouse can not seize the TBE owned assets to satisfy the judgment against one of the spouses. To seize the TBE owned assets, the judgment creditor must have a judgment against both the husband and wife. In the context of asset protection, TBE owned assets are very protected, and therefore very desirable.

In working with physicians and asset protection, TBE is often used to shield assets from potential medical malpractice claimants where one spouse is the physician and the other is not. In that context, if a medical malpractice claimant has a judgment against the physician, the medical malpracitce claimant can not seize the assets that are owned TBE to satisfy the judgment.

TBE is different, and more protected, than owning assets as "joint tenants, with rights of survivorship." A creditor of one of the joint tenants, in that form of ownership, may have the right to seize the judgment debtor owner's "equitable Interest" in the assets owned in that manner. From the asset protection planning perspective, TBE is the form of ownership that provides the most protection from creditors, and it is important that bank accounts, brokerage accounts, and other assets are properly titled to accomplish that result.

However, if an asset is capable of producing liability, you would not want to own it as TBE. For example, the ownership of rental real estate, from an asset protection perspective, should not be titled TBE. Titling real property, that can create premises liability, as TBE, subjects all of the individual assets of each spouse, as well as all of the jointly owned assets (including TBE) of the spouses, to the satisfaction of a judgment that arises out of the ownership of that real property. In fact, from an asset protection perspective, rental real estate, whether commercial or residential, should never be owned by individuals. You should always consider using a legal entity, such as a limited liability company, as the owner of real property that is being rented, or used in a manner that members of the public come upon the property.

When working with clients who are concerned with asset protection as least as much as pure estate planning, it is necessary to help the clients understand that there are trade offs between the two sets of objectives. To obtain maximum asset protection may require different actions than seeking maximum estate planning goals. TBE ownership is good for asset protection planning, but not so good for estate planning (including estate tax planning). The ownership of annuities and life insurance is good for asset protection planning, but may not be as good for pure estate planning. In each case, the individual needs of the client should be carefully examined, and all of the advantages and disadvantages of each alternative should be evaluated from both the asset protection perspective and the estate planning perspective. Only after fully understanding the positive and negative implications associated with each type of asset and the nuances involved with different titling of assets can a client make an informed decision about the proper structuring of their own assets and planning objectives.

A Tale of Two Guardianships

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Tue, 20 Oct 2009 10:47:00 GMT

One afternoon recently I had the opportunity to meet with two different families regarding the need for obtaining a guardianship over a family member of each family. These were two totally unrelated families, with totally different circumstances, other than they happended to be scheduled for back to back appointment with me in my office.

The factual situation for the first family was that their 76 year old mother recently experienced a serious stroke. A woman who was robust, active, and "totally healthy" in all appearances, was suddenly the victim of a stroke that eliminated her ability to speak, or act on her on. The prognosis is that she will, perhaps, recover to the point that she can dress herself one day. She is now confined to a skilled nursing facility, where she will most likely remain for her lifetime.

The second family involved the husband of my new client. It is unclear what triggered the event, possibly a stroke, but for whatever reason, the husband began to engage in extremely unusal conduct and was clearly mentally disturbed. Within the three weeks prior to the consultation with me, the husband was the subject of Baker Act (the Baker Act allows the involuntary confinement of some one who is a danger to themselves or others) proceedings on two separate occasions.

Both families sought consultations to obtain what is called a plenary guardianship over the person and property of the mother and, in the second case, the husband.

A plenary guardianship is a court supervised proceeding where a circuit court judge appoints an individual, or a corporate fiduciary, to become the guardian of the person and the property of an incapacitated person. In a "plenary" guardianship, the incapacitated person (the "ward"), loses all of his or her civil and legal rights, and is subject to the control of the court and the court appointed guardian.

The court may also establish a "limited" guardianship that provides for specified limited areas of control by the court and the court appointed guardian. Other alternatives provide for appointment of a guardian of the property, where the ward may have the ability to make non-financial decisions and needs help only in the area of protecting or managing his or her assets and financial affairs; and a guardian of the person, where there is no need for managment of the financial affairs for some reason (for instance, a revocable living trust has been established and all assets are titled to the living trust), but the ward is not capable of decision making or management of his or her personal and medical needs.

After a plenary guardianship is established, the court appointed guardian has the responsibility to collect and take control of all of the assets of the ward, provide for the appropriate level of personal care for the ward, and provide periodic reports to the court. Any signficant action on behalf of the ward is subject to court control and approval.

A guardianship is a very serious undertaking. The first step in a guardianship is to determine that the proposed ward is legally incompetent, either mentally, physically, or both. When the ward's legal incompetence is established through statutorily prescribed measures, the court enters and order determining the incapacity of the ward and appoints a guardian. The person who is established to be legally incompetent, essentially loses all of their civil and legal rights, including the right to vote, to marry, to contract, to decide on their own medical treatment, or to make their own decisions about their financial affairs, among other rights that are lost.

To establish the right and need for a guardianship, the proposed guardian must show that there is no "less restrictive" alternative to the guardianship to meet the needs of the proposed ward. If there is a less restrictive alternative, the court is obligated to pursue that alternative rather than establish a plenary guardianship. Accordingly, a legal guardianshiop may be avoided if the incapacitated person has engaged in proper estate planning prior to the occurrence of the action or event that precipitated the need for the guardianship.

And, therein lies our Tale of Two Guardianships.

In the case of the first family above, the mother who suffered the stroke did not have in place what we estate planning lawyers call "advance directives." The second family did have advance directives in place.

In the first case, it was necessary to immediately begin the process to have the mother declared by the court to be legally incompetent so that a plenary guardianship could be established, naming one of her daughters as the guardian. Upon appointment as plenary guardian, the daughter will be required to file periodic reports with the court for her mother's remaining life (unless her mother should miraculously recover her mental faculties). Any significant action involving her mother will be subject to court control and approval.

In the second case, the husband had established advance directives: a durable power of attorney, a designation of health care surrogate, and a living will, all naming his spouse as his attonrey in fact and health care surrogate. We explained to our client how to obtain the necessary affidavits from her husband's physicians to establish for purposes of the durable power of attorney and designation of health care surrogate that her husband was incapacitated. The durable power of attorney was not as detailed and complete as we might have like to have seen, but it should be adequate to allow the wife to avoid the necessity of establishing the plenary guardianship, which would subject her husband's assets to the control of the court, and require her to provide the court with periodic reports and accountings. The designation of health care surrogate should provide her with the necessary authority to obtain control over her husband's medical decision making without the necessity of court intervention. With the advance directives, she will have the ability to handle her husband's financial and medical affairs, at less cost, less inconvenience, and more flexibility, wihtout the need for filing reports with the court or seeking court direction on the matters most personal to her and her husband.

A plenary guardianship may also be avoided through the proper use of a revocable living trust, and its proper funding.

Without advance directives in place before they are needed, there typically is no "less restrictive" alternative to a plenary guardianship available, and the guardianship is necessary. By planning in advance, a plenary guardianship may be avoided saving your family substantial expense, time consuming reporting, and the lost of flexibility and control.

Both of these families will now have a family member who very likely will require skilled nursing care in a skilled nursing facility for an extended period of time. In both cases, we are now engaged in developing appropriate Medicaid spend down plans, so that the incapacitated individuals can become eligible for Medicaid benefits as soon as possible. Medicaid planning will allow the families to legally maximize the value of the incapacitated person's assets and income for the incapacitated individual and their family members.

So, the Tale of Two Guardianships tells us, it is always best to be prepared for the worst, by engaging in appropriate estate planning, including a fully fleshed out set of advance directives.

Is Your Will Up To Date With the Estate Tax Exemption?

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Fri, 16 Oct 2009 20:53:00 GMT

Yesterday's Wall Street Journal Online contains an article in the Personal Finance section that should be studied by all married couples who have wills or living trusts written more than a couple of years ago. The article very accurately discusses potential undesirable results of estate tax planning that is contained in many wills and living trusts that were written more than a couple of years ago. The estate tax exemption amount currently is $3.5 million. If your estate is between $1 million and $4 or $5 million, and your will or living trust was written more than two years ago, you should definitely take the time to read the article. After reading it, you may decide you need to see your wills and trust lawyer to determine whether your wills or trusts need to be revised. The following link will take you to the article that discusses the estate tax planninglanguage often used in wills a few years ago:

Is There a Trap Lurking in the Language of Your Will?

Don't Forget About the Gift Tax

rcoleman@thecolemanlawfirm.net (Randy Coleman) — Thu, 15 Oct 2009 10:08:00 GMT

A real estate lawyer friend of mine contacted me earlier this week and posed a series of questions for me regarding a proposed transaction with one of his clients, who he has referred to me for estate planning. We are in the process of designing this client's estate plan, but have not completed any of the actions that will be appropriate for him. The proposed transaction involved the client's long time live-in companion. The client and his girlfriend are not yet married because we are working on the terms of a premarital agreement acceptable to both parties.

The transaction that was at issue involved recent travel by the client. The client had contacted the real estate lawyer to determine what temporary measure could be put in place to allow his fiance to continue to live in his home for as long as she wanted, should he die during this period of international travel.

In Florida, if a person owns a homestead, and is married, the surviving spouse has the Constitutional right to a life estate in the homestead regardless of the manner in which the homestead is titled at the time of the owner's death. That means the surviving spouse can live in the home for his or her lifetime, so long as the homestead is properly maintained, property taxes are paid, mortgage payments are made if there is a mortgage, and the homestead is maintained properly. So, in this case, if the client and his fiance were already married, there would have been no action necessary to protect her right to remain in the homestead should the client expire while out of the country. But, they are not married, and he wanted to protect her right to live there from his legal heirs - his children from a previous marriage in this instance. Certainly, not an uncommon situation in today's mobile society.

The real estate lawyer's proposed solution was a practically efficient one, but as we'll see did not consider several very important considerations that are not involved with the typical real estate transaction. The real estate lawyer suggested that he prepare a deed to be signed by the client, that would transfer to the fiance a life estate in the home that would allow her to live there for her remaining life, and at her death the title to the homestead would transfer to his adult children. The real estate lawyer further proposed that the client would deliver the deed to the real estate lawyer for "holding" pending the client's return from his travels. If the client died during the trip, the real estate lawyer would record the deed transferring the life estate to the fiance in the public records. If the client returned safely from his travels, then the deed would be returned to him and it could be destroyed. The real estate attorney also proposed that the client retain the right, in the deed, to transfer, convey or mortgage the property during his lifetime, so that if the deed was recorded in the public records the client would retain the right to "control" the property during his lifetime.

My real estate attorney friend wanted to know if the proposed transaction would be satisfactory and coordinate with the estate planning that I was putting in place for the client. This conversation was taking place two weeks after the travel was concluded, after the deed was prepared and delivered to the real estate attorney, and, fortunately, the deed was not recorded in the public records.

I explained to my real estate lawyer friend that there were a number of problem with the proposed (aborted) transaction. First, I pointed out a number of potential issues involving the transaction that involved titling to homestead, whether the proposed deed was an effective enhanced life estate deed, issues involving the effectiveness of the deed, and the effectiveness of the conditional delivery of the deed for recording in the event of the client's death during his travels, and a number of other issues surrounding title to the property.

Then, from a purely estate planning perspective, I explained to my friend that there had been no consideration of the potential estate and gift tax issues created by the proposed transaction. The transfer of a life estate to his fiance, with the remainder interest at her death to his children, for no consideration flowing from the fiance and children to the client, is a gift. Pursuant to the provisions of the gift tax sections of the Internal Revenue Code, the transfer of an interest in property for no consideration triggers a transfer tax. If the transfer is made during the donor's (the person making the gift) lifetime, the transfer tax is a "gift" tax. If the transfer is made at death, the transfer tax is the "estate" tax, sometimes euphemistically called the "death" tax.

The Internal Revenue Code provides that there is an annual exclusion to the gift tax, that currently allows everyone to "gift" up to $13,000 of value to any other person in any given year without the requirement for filing a gift tax return, or paying any gift tax. However, if a gift is made to another person the value of which is more than $13,000 in a given year, then the donor is obligated, pursuant to the Internal Revenue Code, to file a gift tax return (IRS Form 709). There may be certain exemptions (each person has a $1,000,000 life time exemption for gifts above the $13,000 exclusion) available for a taxpayer that defer, or eliminate, the gift tax liability, but if none of those exemptions are available the gift tax is imposed on the value of the gift in excess of $13,000 made to each donee (the person receiving the gift). The donor has the obligation to pay the gift tax liability, if the gift does not fall within the annual exclusion amount ($13,000) and the donor has no remaining exemption amount ($1,000,000 lifetime). Even if the person making the gift has some of the lifetime exemption remaining, a gift tax return (the IRS Form 709) is required by law to be filed with the IRS in the year following the making of the gift, and any remaining exemption must be applied until the exemption is exhausted.

The bottom line is, if you make a gift to one person that is valued at more than $13,000 in a given year (all gifts to that individual made during the year must be totaled), then you are obligated by the Internal Revenue Code to file a gift tax return. You may or may not have gift tax liability, but you are required to file the return even if you don't have any gift tax liability.

So, the client who signed the deed transferring a life estate to his fiance, with the remainder interest to his sons, has made a gift. The value of the gift is divided into two parts: the life estate to the fiance, and the remainder interest to the sons. The calculation of the value of the life estate is prescribed by the Internal Revenue Code and depends on current interest rates and the remaining life expectancy of the fiance (in this case she is 40 years old - so has a fairly lengthy life expectancy). The value of the gift to the client's children is determined by discounting the future value of the remainder interest in the property, and discounting it to present value (a calculation required by the Internal Revenue Code).

In this case, the value of both the life estate and the remainder interest is the value of the property. The current fair market value of the client's home is $1.8 million. The real estate lawyer's solution, created a gift of $1.8 million, triggering the requirement that the client file a gift tax return. This client has an estate subject to the federal estate tax, so the transfer if fully taxable. The current gift tax rate is 45%. The gift tax liability for this "temporary" solution to providing the fiance with the security of knowing she would be able to live in the home should the client die while traveling is approximately $800,000. Fairly expensive trip!!

If the parties ultimately execute a premarital agreement that allows the fiance, upon becoming his spouse, to have a life estate in the home, with the remainder interest to the client's children, or otherwise provide for the children and allow the homestead to go to the wife, the $800,000 transfer tax can be eliminated. The client could also have used a revocable living trust, to which he could have transferred the homestead without creating a gift, and then could have provided in the trust that his fiance could reside in the home for whatever period of time was desired, the transfer of the homestead to the revocable trust - because it is revocable - would have eliminated the potential tax liability and avoided the necessity for filing a gift tax return.

There are other negative consequences to the real estate lawyer's solution, including the potential elimination of the Florida homestead exemption from property taxes, as well as creditor protection, lost of "stepped up" basis that will result in higher capital gains taxes upon the ultimate disposition of the homestead by the children, and others as well.

The moral of this story is that anytime there is a transfer of an asset that has a value in excess of $13,000, for less than fair market consideration, the transferor of the property should consider the potential gift and estate tax consequences of the transfer, as well as the income tax consequences, along with the legal requirements necessary to effect the transfer. In that context, it is important to remember, that just like all other professions in today's complex society, different lawyers have different expertise. The real estate lawyer may or may not be experienced in estate and gift tax, or even income tax, matters. The complexity of the tax code, and its application to common transactions, is not always apparent. Whenever contemplating a transfer of a valuable asset, consider consulting with an experienced estate and gift tax attorney to be sure you are not creating tax liabilities unnecessarily. Protect your assets from unnecessary taxation!