Connecticut Estate Planning Report

The State of the Federal Estate Tax

John O'Brien — Tue, 02 Feb 2010 15:28:18 -0500

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

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

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

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

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

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

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

Follow Tom And Ellen On Their T&E Journey

John O'Brien — Fri, 08 Jan 2010 15:28:45 -0500

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

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

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

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

John O'Brien — Fri, 21 Aug 2009 13:00:58 -0500

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

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

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

Thrilled To Be Your Personal Family Lawyer®

John O'Brien — Wed, 05 Aug 2009 13:28:03 -0500

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

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

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

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

John O'Brien — Wed, 03 Jun 2009 10:12:30 -0500

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

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

That Much Closer! Connecticut's Pet Trust Statute

John O'Brien — Thu, 28 May 2009 15:51:18 -0500

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

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

Benefits of a Revocable Living Trust

John O'Brien — Tue, 26 May 2009 16:12:50 -0500

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

(1) Avoiding probate;

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

(3) Avoiding ancillary probate.

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

Are We There Yet? Connecticut's Pet Trust Statute

John O'Brien — Wed, 20 May 2009 13:15:39 -0500

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

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

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

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

John O'Brien — Wed, 06 May 2009 09:00:00 -0500

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

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

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

Is a Life Settlement Right For You?

John O'Brien — Tue, 05 May 2009 12:20:00 -0500

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

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

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

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

Follow Up On The Connecticut Pet Trust Statute

John O'Brien — Wed, 22 Apr 2009 14:08:16 -0500

A further update to Connecticut's attempt to enact a Pet Trust Statute. The Bill that was voted favorably out of the Judiciary Committee, Committee Bill No. 650 and the Bill that is now to be presented to the Senate for action, File No. 707.

In large measure, the two Bills are similar. There is one significant difference from the perspective of a client that wants to establish such a trust -- any trust must be approved by the Probate Court. Apparently the Legislature sees this as an opportunity to generate revenue for the Probate Court because the Probate Courts will charge a fee of between $50-$750 to review the trust. This change creates all kinds of logistical problems for the implementation of these type of trusts, albeit ones that can be overcome, but certainly ones that are better avoided. I am actively involved with seeing this proposed Legislation through this Session and presently involved with trying to see if there can be any movement at the very least on the language that includes the necessity for Probate Court review. Help!! The Bill is not yet on the Senate Agenda, so there is still time.

I think the opportunity is now for Connecticut to adopt this Legislation and if it means we must accept the language, then so be it but the push is on. Over the past two years, I've had to disappoint four clients because Connecticut did not have a Pet Trust Statute. The time is now, let's get it done.

The Art of Estate Planning

John O'Brien — Thu, 16 Apr 2009 11:23:04 -0500

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

Don't Fall Off The Cliff!!

John O'Brien — Wed, 15 Apr 2009 15:32:37 -0500

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

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

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

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

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

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

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

A Great On-Going Gift For Your Upcoming College Graduate

John O'Brien — Wed, 08 Apr 2009 14:02:51 -0500

I recently had a conversation with a colleague who has established what he calls a Gift HSA. His website is found at http://www.theoriginalgifthsa.com. The use of a Health Savings Account ("HSA") has increased over the years.

Just as a brief overview, a HSA is established and presently can be funded up to $3,000 in 2009 for individuals and up to $5,950 for families. Additionally, a high deductible health plan is purchased. The owner of the HSA gets a tax saving on the contribution and tax-free distribution when funds are used for qualified medical expenses. The money grows tax-free in the account and to the extent it is unused, the money can be left to a beneficiary by designation. Sounds and works much like the ever popular IRA.

The whole concept behind the Gift HSA is that you set up the Health Savings Account for a loved one, fund it annually and pay the annual premium on the high deductible health plan, using your annual exclusion gifting (currently $13,000 for individuals and $26,000 for married couples).

What a great gift to the graduating loved one soon to be off your health insurance. You give them the comfort of having health insurance while also potentially providing tax-free growth. It's a great ongoing gift for your upcoming college graduate.

Standby Guardian For Minor Children

John O'Brien — Tue, 31 Mar 2009 15:27:57 -0500

One of the most important aspects of planning for parents is the appointment of a guardian for their minor children. For parents, this is often times one of the most difficult decisions they have to make. Once made, the appointment is made in the parents' respective Wills and is, more often than not, left that way.

The problem with this scenario is that the appointment only becomes effective upon the death of the parents. What if both parents, or the surviving spouse, are simply incapacitated and have not passed on. Well, the appointment in the Will is simply ineffective for this scenario. Thus, all parents must also avail themselves of Connecticut General Statutes Section 45a-624 and make an appointment in a separate written instrument of a Standby Guardian For Minor Children. The written appointment would take effect upon the occurrence of specified contingencies and remain in effect until these contingencies have passed. In the absence of such a written appointment, the probate court would make an appointment, but why allow a disinterested judge to do it when you, as parents, can clearly spell out who you want.

Guardianship For Minor Children

John O'Brien — Tue, 24 Mar 2009 14:38:43 -0500

A client was referred to me recently regarding annuities that had been left to her daughter by the client-mother's deceased brother through beneficiary designation. The annuities were relatively significant and the client-mother wanted to make some changes with the annuities. She contacted the company and was promptly advised that she could not do anything regarding the annuities unless she was appointed as her daughter's guardian. The client-mother protested and indicated "I'm her mother, of course I'm her guardian."

Not necessarily so. The Connecticut General Statutes Section 45a-631 indicates "A parent of a minor . . . shall not receive or use any property belonging to a minor in an amount exceeding ten thousand dollars." This does not relate to money held in a custodian account but rather property belonging to the minor, outside of a custodial account -- like an annuity contract received from a beneficiary designation. To do anything with the annuity contracts -- the client needed to be appointed by the probate court as the guardian for her minor daughter's estate. So parents, don't just assume. Consult with your legal counsel.

Maximize Gifting As A Planning Strategy

John O'Brien — Tue, 17 Mar 2009 09:19:23 -0500

Effective use of gifting can have a substantial impact on reducing an otherwise taxable estate. In this context, we are referring to the use of annual exclusion gifts and payment of tuition and medical expense gifting. There are other forms of gifting to take account of valuation discounts, but that is left for another Blog.

For 2009, each individual is entitled to make an annual tax-free gift of $13,000 to as many individuals as he/she wants. A named couple may thus give away $26,000 to as many individuals they want. The numbers are obvious. A well orchestrated annual gifting strategy can help reduce a taxable estate.

Importantly, a gifting strategy often overlooked by individuals, is the fact that under the Internal Revenue Code, one can make payment of tuition and/or medical expenses for another and not have these payments count against the annual exclusion amount. Yes, this means that you and your wife can pay grandson's tuition and give him $26,000 in the same year thereby reducing your estate and not incurring any gift tax. The payment must be made directly to the school and/or medical provider and tuition means tuition -- not room/board and incidentals.

The tuition expense exclusion can be used to prepay multiple years of tuition payments. Tuition is prepaid to the school and must not be refundable. This strategy is best suited for people concerned that they might not live long enough to pay each year's tuition. Who can afford to make the payments now and not be concerned that the school will get to keep the money regardless of the student's status at the school. (What happens if grandson gets expelled or voluntarily leaves?) Not a problem. To address this concern, we drafted for clients a Health Education Exclusion Trust ("HEET") . Properly done, you can place significant sums into the Trust earmarked for tuition expenses and not be concerned with having prepaid tuition to a school that grandson leaves. Moreover, this type of Trust can benefit multiple generations free of future gift, estate and generation skipping taxes.

To all, we strongly suggest implementation of well-crafted gifting strategies.

Will Connecticut Finally Adopt a Pet Trust Statute?

John O'Brien — Wed, 25 Feb 2009 11:59:36 -0500

The Uniform Trust Code and the Uniform Probate Court have long provided for the establishment of Trusts for pet beneficiaries. Approximately 40 states, if not more, have Statutes on the books providing one the right to establish a Trust for their pets. And now, pending before the Connecticut Legislature, is a Proposed Bill which would establish that same right in Connecticut.

Great news for pet owners, if passed. Pets have become more and more part of the fabric of our families. We have long provided the opportunity for people to leave money and belongings to their human loved ones, but absent specific legislative authorization, one cannot leave money directly to a pet as beneficiary. Presently, one could leave money in a Will or Trust to a person and specifically request that the money be used by that person for the care of a pet. Yet, there is no assurance that the person would do that. A Pet Trust Statute will provide the pet owner with a greater comfort level that the money will be used for the pet.

Such a Trust can be established by Will -- a Testamentary Trust -- and go into effect upon the pet owner's death or the Trust can be established while the pet owner is still alive with the money either put into Trust during life or funded upon death. In either case, the Trust would establish a specific person or persons to serve as a trustee who would have a legal duty to use the money for the care of the pet. Whether the trustee is fulfilling his/her duty would be reviewed by the Courts. There are all other provisions that can be set forth in the Trust Agreement which can ensure that pet owners' wishes are followed. Needless to say, it will be a nice addition to Connecticut's laws if the Proposed Bill passes, so all you pet lovers contact your Legislators. Let's see if it happens.

Welcome To Connecticut Estate Planning Report

John O'Brien — Tue, 24 Feb 2009 11:03:06 -0500

Welcome! Here at CT Trust Counsel, www.cttrustcounsel.net, we are excited about our launch of the Connecticut Estate Planning Report. Our goal is to stimulate discussion and provide information about, and help with a better understanding of, estate planning and asset protection (It is not meant to convey legal advice. One should always consult their professional). We firmly believe that everyone should have an estate plan. It is only through a well-defined estate plan that you can control your own life, preserve your assets for your family's life use and effectively and efficiently pass on your assets to your intended beneficiaries. We look forward to our continuing dialogue, so, here we go.