Bay Area Wills, Trusts & Probate Report

House Passes Pomeroy Bill HR 4154

Karen Meckstroth — Thu, 03 Dec 2009 13:52:30 -0800

Today the House passed HR 4154 to make permanent the $3.5 million individual federal estate tax exemption and 45% federal gift and estate tax rate (and to avoid the scheduled repeal of the federal estate tax in 2010). It appears that all Republicans and 26 Democrats voted against the bill -- I will update this information if my numbers are off. From what I hear from others closer to Washington, the Senate won't pass the bill without significant changes. Chances are there isn't time to do this by the end of the year.

According to an article by Arthur D. Postal today in National Underwriter Life and Health Insurance News:

Observers expect the Senate to pass a measure that will merely extend the current rate on a temporary basis. The Senate probably will deal with the issue when it works on comprehensive tax reform legislation in 2010.

Although the House acted today, the future of the federal estate tax is still anybody's guess.

House to Vote on HR 4154 Today

Karen Meckstroth — Thu, 03 Dec 2009 08:24:57 -0800

The Office of the House Majority Leader released today's floor schedule. The House is voting on HR 4154 today.

House to Vote Soon on HR 4154

Karen Meckstroth — Wed, 02 Dec 2009 14:00:59 -0800

Today, OMB Watch posted House Set to Vote on Pomeroy Estate Tax Bill by Gary Therkildsen.

According to the article, we could see a vote on H.R. 4154 as early as tomorrow. (Admittedly, some of us were disappointed not to see a vote today.) The OMB Watch article summarizes and provides links to:

OMB Watch's statement of support (pdf) for the bill
analysis (pdf) released today by the Center on Budget and Policy Priorities
report (pdf) released today by Citizens for Tax Justice

H.R. 4154 provides for a $3.5 million federal estate tax exemption for individuals ($7 million per couple) and sets the federal gift and estate tax rates at 45%. Therkildsen reports that the Center on Budget and Policy Priorities finds the Pomeroy bill "more than reasonable" and Citizens for Tax Justice "concludes that H.R. 4154 is somewhere in the middle of the spectrum between good and bad tax policy."

Therkildsen also reports:

On the other side of the debate, legislators looking to further reduce or eliminate the estate tax are preparing to introduce their legislation as well. A bi-partisan bill (H.R. 3905) sponsored by Rep. Shelley Berkley (D-NV), which almost mirrors a Senate proposal introduced by Sens. Blanche Lincoln (D-AR) and Jon Kyl (R-AZ), would reduce the estate tax to a $10 million per couple exemption at a 35 percent rate.

Stay tuned!

House Could Vote Wednesday on Estate Tax Legislation

Karen Meckstroth — Sat, 28 Nov 2009 18:33:44 -0800

Hani Sarji, an LL.M. candidate in Tax at New York Law School, is keeping track of Congress's increased activity to do something about the federal estate tax before the end of the year on his blog -- Future of the Federal Estate Tax. Hani Sarji recently provided a link to a Dow Jones Newswires article by Martin Vaughan (US House To Vote On Permanent Estate Tax Bill Next Week) that reports that the House will vote on a new bill:

The U.S. House of Representatives next week will vote on legislation to extend current estate tax rates permanently, but when and what action the Senate might take on the bill remains unclear.

The House will vote next week, Wednesday at the earliest, on estate tax legislation from Rep. Earl Pomeroy (D., N.D.), according to a schedule released by House Democratic leaders.

The Pomeroy bill would make permanent a 45% rate on inherited wealth, with the first $3.5 million exempt from the tax. Without congressional action, the tax will be repealed in 2010 and return in 2011 at a 55% rate with a $1 million exemption.

The Pomeroy bill appears to be HR 4154, which is the second estate tax bill introduced by Representative Pomeroy this year. This bill -- known as the "Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009" -- does the following:

repeals the new carryover basis rules
retains the estate tax
provides for a $3.5 million exemption
freezes estate and gift tax rates at 45%

Check here for Hani Sarji's updated list of all the estate tax bills introduced in Congress this year.

New Bills Aim to Restore Estate Tax in 2010

Karen Meckstroth — Wed, 28 Oct 2009 10:36:47 -0800

On October 22nd, Rep. Berkley (D-NY) introduced H.R. 3905 to "amend the Internal Revenue Code of 1986 to repeal the 1-year termination of the estate tax, to increase the estate and gift tax unified credit, and to coordinate a reduction in the maximum rate of tax with a phaseout of the deduction for State death taxes."

The bill increases the federal estate tax exemption from $3,650,000 in 2010 to $5,000,000 in 2019 and thereafter. The bill decreases the maximum tax rate from 44% in 2010 to 35% in 2019 and thereafter.

On October 15, 2009, Rep. Schrader (D-OR) introduced H.R. 3841 (pdf) "[t]o amend the Internal Revenue Code of 1986 to repeal carryover basis for decedents dying in 2009, to increase the estate tax exemption to $5,000,000, and to reduce the maximum estate and gift tax rate to 45 percent."

Upcoming Seminar: Presence and Ethics at the End of Life

Karen Meckstroth — Tue, 27 Oct 2009 15:31:48 -0800

On November 12th, I will be giving a Silicon Valley Bar Association seminar on Preparing for Dying: Presence and Ethics at the End of Life with sociologist and filmmaker Dr. Michelle Peticolas and estate planning attorney Deborah Radin of Kramer Radin, LLP.

We will begin the seminar by watching Dr. Peticolas's award-winning documentary, Caring for Dying: the Art of Being Present. You can view a trailer for the film here.

Deborah Radin will cover the benefits of using advance health care directives to make decisions about the end-of-life. She will also discuss what an "ethical will" is and how individuals can use ethical wills to transfer their personal values, history and legacy.

I will discuss estate planning ethical issues and rules of professional conduct when representing a client at the end of life. If you are an estate planning attorney who has worked with clients in hospice, you are aware that there are numerous ethical issues, including knowing who the client is, undue influence, and capacity. I plan to cover these and other topics.

Attorneys will receive one hour of ethics credit for attending the seminar. You can register for the event through the Silicon Valley Bar Association.

Estate Tax Set to Expire (Temporarily) as Congress Waits

Karen Meckstroth — Mon, 21 Sep 2009 15:50:46 -0800

As we enter the last quarter of 2009, the future of the federal estate tax remains uncertain.

Will the estate tax be repealed for a year in 2010? (Doubtful.)
Will Congress enact major tax legislation by the end of 2009? (Also doubtful -- more likely, we will see a one-year fix to avoid repeal in 2010.)
Will the federal estate tax exemption revert to $1,000,000 in 2011 or will Congress increase the exemption, perhaps by freezing the exemption at 2009 levels as suggested by the Obama administration? (A couple months ago I predicted a $3.5 million exemption, but I have to admit that suspense about this question is building.)
Will the top tax rate be 55% or 45%? (Probably 45% in 2010 (the one-year quick fix), but who knows about 2011!)

An article appearing in the WSJ -- Estate Tax Faces Its Own Life-and-Death Struggle -- provides a status report:

President Barack Obama and congressional Democrats are united behind an effort to block a scheduled year-end repeal of the estate tax. But prospects are blurred by divisions between the House and Senate over the contours of a restored tax, as well as Capitol Hill's focus on health care . . . .

Officially, Republicans in Congress would like to see it disappear on schedule. . . . But very few believe that is possible. . . .

[S]harply different bills in the House and Senate could make a long-term solution elusive. With health care and routine spending bills jamming the Senate calendar, an estate-tax fight -- first on the Senate floor, then with the House -- could make passage of a bill virtually impossible this year, House and Senate aides say. Lawmakers likely would fall back on a one-year extension of the current rate and exemption and leave the fight to next year. . . .

Even [Democratic Senator Blanche Lincoln of Arkansas, who is up for re-election in a state where opposition to the estate tax is solid,] has her eyes elsewhere. 'Our complete focus is on health care,' said Ben Portis, a spokesman for the senator. 'On the estate tax, there will be a time and place.'

Thank you to Professor Paul Caron, author of the Tax Prof Blog, for posting a summary of the WSJ article earlier today.

Short-Term Fix to Estate Tax Seems More Likely

Karen Meckstroth — Tue, 15 Sep 2009 13:45:06 -0800

David Shulman writes today in his South Florida Estate Planning Law blog about an article from The Hill that adds to the growing speculation that Congress will enact a one-year extension of current estate tax rates and postpone a permanent fix until next year:

A split among Democrats and a busy fall agenda is likely to have lawmakers hold off this year on debating the future of the estate tax, even though it expires at the end of the year.

Experts and aides say a more realistic scenario involves Congress passing a one-year extension and then tackling the issue as part of broader tax reform next year.

Representative Pomeroy is holding out hope that there is time to enact new estate tax legislation this year:

Rep. Earl Pomeroy (D-N.D.), a senior member of the House Ways and Means Committee, said that the House tax-writing panel should consider a long-term solution this month or in October.

Pomeroy said lawmakers should do “something meaningful with the estate tax issue for the American people and eliminate the uncertainty of the present tax code.” Pomeroy said he has been asked by Ways and Means Committee Chairman Charles Rangel (D-N.Y.) to prepare new estate tax legislation for the panel.

September 7520 Rate Remains Low

Karen Meckstroth — Fri, 04 Sep 2009 16:05:00 -0800

Federal interest rates for September (pdf) are still very, very low. The Section 7520 rate remains at 3.4% for a third month in a row. Likewise, applicable federal rates remain low -- the mid-term rate (a 3 to 9 year term) is 2.87% (annual compounding).

Individuals who want to take advantage of low interest rates and low asset values should consider using one or more of the following estate and gift tax planning vehicles:

a grantor retained annuity trust (a "GRAT")
an installment sale to a grantor trust
a qualified personal residence trust (a "QPRT")
a charitable lead annuity trust

There is talk among some estate planning commentators that we are unlikely to see legislation enacting a 10-year minimum GRAT as proposed in the Greenbook. These commentators explain that the ten year minimum can be easily defeated by using a steeply declining GRAT.

Michael Jackson's Will Makes Sense in California

Karen Meckstroth — Mon, 06 Jul 2009 22:36:01 -0800

There is nothing dramatic about the structure of Michael Jackson's basic estate plan. At least not in California. It looks like Michael Jackson set up a revocable living trust (the Michael Jackson Family Trust) and a "pour over" will (pdf). Most Californians who establish estate plans, even Californians with modest estates, use revocable living trusts to dispose of their property. The trust, not the will, directs how to distribute the individual's assets on death. The will "pours over" to the trust and, in the case of a parent, nominates guardians for minor children.

The California Bar Association's pamphlet "Do I Need a Living Trust" describes how a revocable living trust like the Michael Jackson Family Trust works:

What is a living trust? It is a written legal document that partially substitutes for a will. With a living trust, your assets (your home, bank accounts and stocks, for example) are put into the trust, administered for your benefit during your lifetime, and then transferred to your beneficiaries when you die.

The terms of the revocable living trust are private. Unlike a will, the trust is not lodged with the court. The terms of the Michael Jackson Family Trust will not become public unless there is a trust contest or other proceeding involving the trust. Or the trust is leaked to the public.

One reason Californians prefer to use a revocable living trust instead of a will to dispose of their assets is the high cost of probate in California. Probating an estate in California is usually much more costly than a trust administration. From the Bar Association's pamphlet:

How could a living trust be helpful at my death?

The assets held in your living trust could be managed by the trustee and distributed according to your directions without court supervision and involvement. This can save your heirs time and money. . . .

If your assets (those in your name alone) are not in a living trust when you die, they would be subject to probate. Probate is a court-supervised process for transferring assets to the beneficiaries listed in one's will. . . .

Probate can take more time to complete than the distribution of property held in a living trust. In addition, assets tied up in probate may not be as readily accessible to the beneficiaries as those held in a living trust. And the cost of a probate is often greater than the cost of managing and distributing comparable assets held in a living trust.

A trust alone will not avoid probate. After someone sets up a revocable living trust, he or she must take steps to transfer assets to the trust. (Some assets are not subject to probate and are not transferred to the trust -- for example, retirement plans with beneficiary designations.) Even though Michael Jackson set up the Michael Jackson Family Trust, a probate may still be necessary if "probatable" assets were left outside the trust. There are some other possibilities, short of a formal probate, such as transferring assets to the trust by means of a Heggstad petition.

From the Bar Association pamphlet:

If I have a living trust, do I still need a will?

Yes. Your will affects any assets that are titled in your name at your death and are not in your living trust or some other form of ownership with a right of survivorship. If you have a living trust, your will would typically contain a pour over provision. Such a provision simply states that all such assets should be transferred to the trustee of your living trust after your death. (This does not mean, however, that your beneficiaries can avoid going through probate for these assets.)

Michael Jackson did what most Californians do when they set up their estate plans. He established a revocable living trust and a pour over will. The Michael Jackson Family Trust, and not Michael's will, dictates how Michael's estate is to be distributed. Most likely, the Michael Jackson Family Trust establishes separate share trusts for each of his children. There may also be distributions to other family members and charity. The trusts for Michael's children may last for their lifetimes with distributions to Michael's future grandchildren. Or the trusts for his children may terminate during their lifetimes. We don't really know.

Which brings us to another reason Californians prefer revocable living trusts to wills -- privacy.

Estate Tax Change Is Around the Corner: A Recap of the Current Proposals

Karen Meckstroth — Mon, 15 Jun 2009 19:30:43 -0800

With 2010 nearing, we should see Congress act in the next few months to pass new estate tax legislation. What changes can we expect to see?

Here is a recap of where we are:

Federal Estate Tax Exemption and Rates:

Congress's concurrent budget resolution for fiscal year 2010 is based on the assumption that the federal estate tax exemption will be frozen at $3.5 million with a 45% tax rate.
Members of Congress have introduced a number of House and Senate bills, ranging from repeal of the estate tax to Rep. McDermott (D-WA)'s "Sensible Estate Tax Act of 2009" (H.R. 2023), which calls for a $2 million exemption with new graduated rates of 45%, 50% and 55%.
The Treasury Department's "Greenbook," (pdf) which explains the Obama Administration's fiscal year 2010 revenue proposals, states on p. 125 of the Appendix: "Estate and gift taxes are assumed to be extended at parameters in effect for calendar year 2009 (a top rate of 45 percent and an exemption amount of $3.5 million)."
I believe that the most likely outcome is a $3.5 million exemption at a 45% rate -- but we will have to wait and see what legislation Congress actually passes.

Portability:

Members of the House and Senate have introduced bills (H.R. 2023 and S. 722) calling for portability -- i.e., the transfer of a deceased spouse's unused unified credit to the surviving spouse
The Greenbook does not mention portability
Policymakers have discussed portability for years -- will Congress makes portability a reality? It's hard to predict what will happen.

Other Greenbook Proposals

The Greenbook contains three proposed changes to the estate and gift tax laws starting on page 119:

Require Consistency in Value for Transfer and Income Tax Purposes
Modify Rules on Valuation Discounts
Require Minimum Term for Grantor Retained Annuity Trusts (GRATs)

Ronald D. Aucutt discusses these proposals in Capital Letter No. 17 published on the ACTEC website. The article provides in-depth analysis of the proposals, and I recommend reading it in its entirety. Below, I have excerpted parts of Aucutt's discussion:

Require Consistency in Value for Transfer and Income Tax Purposes:

. . . this proposal would require the income tax basis of property received from a decedent or donor to be equal to the estate tax value or the donor’s basis.

The proposal would be effective as of the date of enactment.

Modify Rules on Valuation Discounts:

The proposal is to create a category of "disregarded restrictions" that would have to be ignored when valuing an interest in a family-controlled entity (such as an interest in a family limited partnership) transferred by one family member to another. It would apply to transfers after the date of enactment, but would not apply to restrictions created on or before October 8, 1990. Aucutt comments:

. . . . Using section 2704(b) as a framework, the proposal would create a more durable category of “disregarded restrictions.” Disregarded restrictions would “include” restrictions on liquidation of an interest that are measured against standards prescribed in Treasury regulations, not against default state law. Thus, no change in state law would affect the reach of the statute. In addition, the Greenbook is careful to cast its references in terms of all “entities,” not just corporations or partnerships.

Although the Greenbook does not say so, it is possible that that the “disregarded restrictions” in view, which “include” certain limitations on liquidation (the current scope of section 2704(b)(2)(A)), may also include other restrictions, such as restrictions on management, distributions, access to information, and transferability. . . .

Disregarded restrictions would also include limitations on a transferee’s ability to be admitted as a full partner or other holder of an equity interest, thus apparently overriding any disposition to value a transferred interest as an “assignee” interest. Treasury would be empowered by regulations to ignore the ownership of certain interests by charities, treating those interests as held by the family. . . .

Require Minimum Term for Grantor Retained Annuity Trusts (GRATs):

"Zeroed-out" GRATs survive under the proposals. Instead, the proposals target short-term and rolling GRATs. The proposals require GRATs to have a minimum term of ten years. The 10-year term increases the probability that the grantor will die during the GRAT term -- in other words, it increases the risk that some or all of the GRAT assets will be included in the grantor's gross estate. The proposal would apply to GRATs created after the date of enactment. Aucutt comments:

After reciting the history of section 2702 and the use of GRATs, the Greenbook notes that “[t]axpayers have become more adept at maximizing the benefit of this technique, often by minimizing the term of the GRAT (thus reducing the risk of the grantor’s death during the term), in many cases to 2 years, and by retaining annuity interests significant enough to reduce the gift tax value of the remainder interest to zero or to a number small enough to generate only a minimal gift tax liability.”

While rumors have occasionally been heard of congressional plans to limit the attractiveness of GRATs by imposing a minimum gift tax value for the remainder (such as 10%), the Greenbook instead proposes to increase the mortality risk of GRATs by requiring a minimum ten-year term.

The Greenbook proposals are proposals, not law. But the proposals identify substantive changes in tax legislation that we could see in the next few months. Again, we will have to wait and see.

IRS Releases Section 7520 Rate for June

Karen Meckstroth — Wed, 20 May 2009 17:42:06 -0800

In my last post, I explained how the low Section 7520 rate and depressed asset values make this a good time for some individuals to do a GRAT or re-GRAT an old GRAT. The IRS has released the 7520 rate for June -- 2.8%. The rate is higher than the 7520 rate for May, but is still very low.

The Time Is Right for a GRAT (or Re-GRAT)

Karen Meckstroth — Thu, 07 May 2009 21:34:26 -0800

A grantor retained annuity trust (GRAT) is a particular type of irrevocable trust -- the grantor retains an annuity for a term of years and the remaining assets pass to named beneficiaries when the term ends. When a GRAT works, the grantor can pass assets to the next generation with little or no gift tax. When a GRAT "fails," nothing is left in the GRAT to pass on. The assets are returned to the grantor (or the grantor's estate), and the grantor is out the legal fees for setting up the GRAT with nothing to show for it.

Low federal interest rates and depressed asset values make this a good time for some individuals with large estates to do a GRAT or to "re-grat" an old GRAT that is failing.

From Revising Grantor-Retained Annuity Trusts in the Wall Street Journal:

Here's how a GRAT works: The grantor puts his or her assets into the trust and gets back an annuity that pays a fixed amount each year. Any assets left when the GRAT ends pass to the beneficiary -- usually the grantor's children -- tax-free.

Gift tax is paid upfront on what is known as the present value of the remainder of the trust. This is calculated by the taxpayer's attorney or accountant; a key to the formula is the hurdle rate. It is the assumed rate of return for the assets.

In fact, most GRATs are set up so that no gift tax will be owed. This is done by setting the present value of the remainder of the trust at zero, a practice known as "zeroing out" a GRAT. The person who sets up the GRAT generally takes back annuity payments equal to the value of the asset transferred to the trust, plus the 7520 rate.

As pointed out in the WSJ article, the annuity is calculated using an assumed rate of return on the assets -- the Section 7520 rate. GRATs work when the trust assets appreciate more than the Section 7520 rate.

A GRAT makes sense with assets that are expected to appreciate -- such as pre-IPO stock and undervalued securities. A GRAT also makes sense now because the current Section 7520 rate -- just 2.4% -- is unusually low. To emphasize just how low the current 7520 rate is, compare it to May 2008 (3.2%), May 2007 (5.6%), or May 2006 (5.8%). For a GRAT that is set up this month to work, the assets in the trust will need to grow by more than 2.4%. Even the most pessimistic among us has to admit this will be a pretty low hurdle once the market recovers.

If this is a good time to establish a new GRAT, it is a great time to fix a failing GRAT. Some existing GRATs are coming up bust because the assets in the trusts have depreciated and won't recover before the GRATs end -- especially since the 7520 rates that were in existence when the GRATs were set up are higher than the current rate. There is just too much lost ground to make up. This is where "regratting" comes in. According to the WSJ article:

The process involves replacing assets in an existing GRAT, such as stock, with others, such as cash, of an equal amount. The person then takes the shares and puts them into a new GRAT. . . .

'It's an optimal time to regrat,' says Michael J. Jones, a certified public accountant and partner at Thompson Jones LLP in Monterey, Calif., who has regratted trusts for a number of his high-net-worth clients.

The assets that are moved to the new GRAT will have a chance to outperform the lower 7520 rate, so the increased value in the assets can pass tax-free to the next generation.

I believe it is important for a client to work with his or her financial advisor before making the decision to establish a GRAT. The decision to do a GRAT should not be made in isolation, but should be part of an overall plan given the client's current situation and future goals. Among other things, the client should work with his or her financial advisor to determine if the client has the financial security to part with the future appreciation on assets transferred to the GRAT.

Although a GRAT will make sense for some individuals with large estates, it won't make sense for everyone. Consider the following:

If the grantor dies before the end of the GRAT term, some or all of the trust assets will be included in the grantor's estate for estate tax purposes.
The GRAT is not effective, from a generation skipping transfer (GST) tax perspective, to transfer assets to grandchildren.

The problem with using a GRAT to transfer wealth to grandchildren is the estate tax inclusion period (ETIP). This means that the GST exemption is applied at the end of the GRAT term, after the assets have appreciated. This is not the best use of the GST exemption. There are other options to consider if someone wants to transfer assets to grandchildren.

The IRS sets the Section 7520 rate each month. We don't know what the rates will be next month or the next. But, for the time being, the Section 7520 rate is so low that a GRAT or re-GRAT can be a smart option.

Budget Calls for Congress to Do Away with 2010 Estate Tax Repeal

Karen Meckstroth — Thu, 30 Apr 2009 15:04:31 -0800

This week, the House and the Senate approved the concurrent budget resolution for fiscal year 2010. The budget calls for a permanent extension of the 2009 federal estate tax levels -- in other words, a $3.5 million federal estate tax exemption per individual and a 45% top federal estate tax rate.

The budget also calls on Congress to "extend incentives for enhanced charitable giving from individual retirement accounts, including life-income gifts." This language refers to extending and expanding the IRA charitable rollover.

The budget resolution does not change current tax laws. It is a nonbinding document. Unless Congress acts, the estate tax will be repealed for 2010 and will return with a $1,000,000 federal estate tax exemption in 2011. But the budget is a blueprint for major tax legislation and indicates Congressional support for a permanent extension of the 2009 federal estate tax levels.

The New York Times and the Wall Street Journal reported on Congress's approval of the budget resolution.

If you'd like a nice roadmap to the federal budget process, the Center on Budget and Policy Priorities offers this overview.

Spring Reading

Karen Meckstroth — Sun, 26 Apr 2009 20:10:17 -0800

I've always been a big reader. I'm also fascinated by "recommended reading" lists. The editors and writers of SmartMoney have recommended "10 Smart Books" that I wanted to pass along. I think I will start with Bold Endeavors by Felix Rohatyn.

Will Congress Expand the IRA Charitable Rollover This Time?

Karen Meckstroth — Fri, 24 Apr 2009 18:42:43 -0800

Currently, individuals who are at least 70 1/2 are able to make tax-free charitable gifts directly from their IRAs to eligible charities. This law is set to expire at the end of the year. There are also some important restrictions under the current law:

The donor must be at least 70 1/2
Charitable IRA distributions are capped at $100,000 annually
Gifts cannot be "life income" gifts -- the IRA distribution cannot be made in exchange for a charitable gift annuity, to a charitable remainder trust, or to a pooled income fund
Gifts cannot be made to private foundations, donor advised funds, or supporting organizations

On April 22nd, Senator Dorgan (D-ND) and Senator Snowe (R-ME) introduced The Public Good IRA Rollover Act of 2009 (S. 864) to make the charitable IRA rollover permanent and expand current law. Versions of this bill were introduced in prior sessions of Congress, but did not survive. The Partnership for Philanthropic Planning issued a bulletin that describes the new Senate bill:

This legislation would make the IRA Charitable Rollover permanent, remove the $100,000 annual limit on donations, provide IRA owners with a planned giving option starting at age 59½, and allow for distributions to supporting organizations, donor-advised funds, and private foundations.

Companion legislation (H.R. 1250) was introduced in the House last month.

The bill contains the following provisions:

Donors still have to be 70 1/2 to make direct charitable gifts from their IRAs
Starting at age 59 1/2, donors can make planned gifts using IRA funds -- i.e., gifts in exchange for a charitable gift annuity, gifts through a charitable remainder trust or to a pooled income fund (with special rules, of course)
The $100,000 annual cap is removed
Gifts can be made to public charities and private foundations, donor advised funds and pooled income funds

The House and Senate bills are in committee. As you know, many bills don't get any further. But if the bills survive, I'll continue to report on their progress. The ability to make lifetime tax-free gifts of IRA assets to charity has been an attractive choice for some individuals who are concerned about the heavy taxation of IRA assets and are charitably inclined.

Statute of Limitations Seminar This Thursday

Karen Meckstroth — Mon, 20 Apr 2009 16:51:40 -0800

If you're an estate planning or litigation attorney in Silicon Valley and don't already have lunch plans for Thursday the 23rd, don't miss the presentation by trusts and estates litigation attorneys Ellen McKissock and Steve Braccini titled "Almost Everything You Ever Wanted to Know About Nearly Every Statute of Limitations, In an Hour." The seminar is offered by the Trusts & Estates Section of the Silicon Valley Bar Association. Here's a description:

Estate Planners and Litigators alike must be wary of the pitfalls of the various and intertwining statutes of limitations in the (mine)field of probate. Some claims have explicit limitation periods called out in the Probate Code, while other causes of action dovetail with statutes of limitation in the Code of Civil Procedure. Some actions have no limitations period at all, while others require analysis of the underlying cause of action to determine the time deadline. Join Ellen McKissock and Steve Braccini of Hopkins & Carley as they attempt to unravel for you the various statutes of limitations and their interplay. Attend, and don't be late or you will be time barred!

Seminars are open to both members and non-members of the Silicon Valley Bar Association. There is still time to register. Follow the link above for all the details.

Special Planning for Children with Disabilities

Karen Meckstroth — Thu, 16 Apr 2009 14:12:33 -0800

I find that one of the toughest parts of the estate planning process for many parents is deciding how they will leave their property to their children after their deaths. Estate planning brings up many parenting issues -- our dreams for our children's futures, our concerns about giving a child too much too soon, our desire to help our children overcome obstacles without creating a disincentive to be productive.

After sorting through these issues, parents end up structuring their estate plans in ways that make sense for their own families. In some plans, parents direct that their assets will be used only as a safety net. In others, parents direct the trustee to use trust assets to maintain their children in the same lifestyle the parents enjoyed. Some parents decide property should pass outright to their children shortly after the children reach adulthood. Some decide to keep property in trust until their children reach their 30s or 40s. Others decide to keep property in trust for their children's entire lifetimes with the remaining assets eventually passing to grandchildren.

When a parent has a child with disabilities, the parent faces the additional challenge of figuring out how to provide support and care for the child for the child's lifetime. The child may be unable to earn an income. The child may require the assistance of caretakers. On-going medical costs may be high. It is often critical to preserve the child's eligibility for SSI and Medi-Cal as part of the plan, whether the child currently receives benefits or may apply for benefits in the future.

The approaches to estate planning that make sense in many family situations may not make sense if a parent is planning for a child with disabilities. This is because there are strict restrictions on the assets and income of SSI and Medi-Cal recipients. Parents and other family members may unknowingly jeopardize the SSI and Medi-Cal eligibility of a child by leaving property outright to the child or naming the child as the beneficiary of a support trust. A properly drafted special needs trust preserves eligibility, because the trust assets are not counted as the resources of the SSI or Medi-Cal recipient. The special needs trust allows the child to benefit from private sources -- such as life insurance proceeds and gifts from parents and other family members -- while preserving the child's eligibility for needs-based public benefits.

Special needs trusts fall into two categories -- third-party and first-party SNTs. Third-party SNTs are funded by someone other than the beneficiary. First-party SNTs are funded with the beneficiary's own assets. This post focuses on the third-party special needs trust. There are important requirements not mentioned here that must be followed to establish a first-party special needs trust.

Some key concepts about third-party special needs trusts:

The trust can be established as a stand-alone trust during the parent's lifetime or can be established on the parent's death under the terms of the parent's own revocable living trust.
The beneficiary of the special needs trust cannot be the trustee of the trust, cannot control the distributions from the trust, and cannot revoke the trust and use the trust assets for his or her benefit.
The trust assets must supplement and not supplant government benefits.
Depending on the situation, the trust may be drafted to allow distributions that result in the reduction of public benefits in order to allow flexibility.
The concept of "special needs" is broad. If the beneficiary receives SSI and Medi-Cal, then the trustee can use trust assets for basically anything other than food, "shelter," and Medi-Cal provided medical services.
There are different ways to fund the third-party SNT. Parents may want to seek the advice of an investment advisor or life insurance professional with expertise in planning for individuals with disabilities.

A special needs trust does not always make sense, but in many cases it is an important part of the overall plan for a child with disabilities to lead a happy, productive and dignified life.

The information provided in this website/blog is for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice.

Building an Endowment & Planned Giving in a Recession

Karen Meckstroth — Fri, 10 Apr 2009 14:57:59 -0800

I was in San Diego yesterday to give a presentation to the Board of Directors of Employment & Community Options, a public charity that provides employment services for disabled adults in multiple counties in California.

The presentation focused on endowment building and planned giving. We discussed why an endowment is key to the survival of a charity -- how, for example, an endowment can safeguard a charity if annual gifts or government funding drops off. We talked about planned gifts -- gifts like bequests, gifts of life insurance, and charitable remainder trusts.

You might think that all charitable giving decreases in an economic downturn, when just about everyone is feeling the pinch. But some recent studies conclude that charitable bequests (gifts in wills and revocable living trusts) actually increase in recessions. (Thank you to the Nonprofit Law Prof Blog.)

This makes sense to me based on my own work with clients. A lot of people want to make charitable gifts, but they may be unwilling or unable to part with any of their income. Instead, they might name a charity in their will or trust to receive a specific sum or a percentage of their estate after their death.

If you want to make a bequest and already have a will or trust in place, you should see your estate planning attorney to draft a codicil (for a will) or trust amendment (for a trust). If you are doing your estate plan for the first time, part of the planning process should focus on your charitable goals, including whether you want to make gifts to charities in your will or trust.

Sen. Baucus Moves to Make 2009 Estate Tax Levels Permanent

Karen Meckstroth — Mon, 30 Mar 2009 15:44:51 -0800

Senate Finance Chair Max Baucus (D-MT) has introduced a bill to make the 2009 federal estate tax levels permanent, to unify the estate tax and gift tax, and to allow transfer of a deceased spouse's unused unified credit to the surviving spouse. The bill -- the “Taxpayer Certainty and Relief Act of 2009”(pdf) -- deals with numerous other tax issues as well, including individual tax rates, the child tax credit, marriage penalty relief, and the alternative minimum tax.

Under current law, in 2009, the federal estate tax exemption is $3.5 million, the lifetime gift tax exemption is $1 million, and the top federal estate and gift tax rate is 45%. The federal estate tax is set to be "repealed" for one year in 2010 and will return in 2011 with a $1 million federal estate tax exemption and a 55% top tax rate. Current law makes no provision for "portability" of a deceased spouse's unused exemption. In other words, if Fred dies with a taxable estate that is less than his federal estate tax exemption, Fred's excess exemption amount is lost and Wilma can't use it.

What the Bill says:

Section 301 of the Bill unifies the estate tax and the gift tax. In other words, the federal estate tax exemption and the gift tax exemption would be the same. Instead of a $3.5 million estate tax exemption and a $1 million gift tax exemption, both the estate tax and the gift tax exemptions would be $3.5 million.
Section 301 of the Bill sets the federal estate tax exemption at $3.5 million, adjusted for inflation, and sets the top tax rate at 45%.
Section 302 of the Bill creates portability of the deceased spouse's unused exemption.

Attorney Juan C. Alvarez discusses portability under the Bill in his Florida Probate & Trust Litigation Blog. Attorney Greg Herman-Giddes also discusses the ramifications of portability in his North Carolina Estate Planning Blog.

Portability is not automatic. The Bill requires the executor of the deceased spouse's estate to make an election on a timely filed federal estate tax return. If Fred's taxable estate is $2 million and his executor makes a timely election, then, under the Bill, Wilma's exemption for estate and gift tax purposes is her $3.5 million plus Fred's unused $1.5 million. At a tax rate of 45%, the portability of Fred's unused exemption allows Wilma to pass an additional $675,000 free of federal estate or gift tax.