Tennessee Estate Planning Law

The Great 2012 Gifting Opportunity - Part 5: Tennessee Gift Tax Clawback

Bryan Howard — Thu, 17 May 2012 08:10:14 -0600

This is the fifth article of a series designed to provide guidance for those individuals who are considering making a large gift in 2012 to take advantage of the $5.12 million federal gift tax exemption that will expire at the end of the year. For prior articles, see:

Part 1: Use It or Lose It,

Part 2: Can You Afford to Make a Large Gift?,

Part 3: When Should You Make the Gift?, and

Part 4: Will a Large Gift Demotivate Your Children?

Two weeks ago, the Tennessee legislature decided to repeal Tennessee gift taxes, effective as January 1, 2012. They also agreed to phase out inheritance taxes over a four-year period. The combination of the total repeal of the gift tax and the phased out repeal of the inheritance tax creates an unintended consequence. Assume that a client makes a gift of $5,120,000 in 2012 and then dies in 2013 owning no assets. There would be no federal or Tennessee gift tax associated with the gift in 2012. There has been some uncertainty regarding the federal estate tax consequences. The majority of commentators assume that there will be no federal estate tax. Nevertheless, some believe that the IRS will try to assess estate taxes even though the estate has no assets. This danger of paying estate taxes based on a tax-free gift is referred to as “clawback”.

Tennessee definitely has a clawback problem. Unlike the federal statute, the Tennessee statute is very clear. When you die, you must add back to your estate gifts made within three years prior to death (other than gifts covered by the $13,000 annual exclusion). This means that the estate will have a phantom asset of $5,120,000 for Tennessee inheritance tax purposes. After subtracting the Tennessee inheritance tax exemption of $1,250,000 in 2013, the estate will owe Tennessee inheritance taxes on $3,870,000. The tax on this amount equals $356,000. Even though there was no tax on the gift when made and the person died with no assets, his or her estate will owe $356,000 of Tennessee inheritance tax.

You are probably wondering who will pay the tax. There is legal concept called transferee liability that would make the donee of the gift liable for the tax if the estate cannot afford to pay it.

If the client is not married or does not intend to use the marital deduction, making the gift in 2012 will not increase their overall Tennessee taxes as compared to not having made the gift. However, if the client is married and plans to use the Tennessee inheritance tax marital deduction, the 2012 gift can result in a tax when there would not have otherwise been a tax if no gift had been made. If no gift had been made, the client could set aside $1,250,000 in a credit shelter trust, or give it directly to children. The remainder of the estate would pass to the spouse or to a marital trust. Under this no gift scenario, no Tennessee tax would be owed at the death of the first spouse. If the surviving spouse lives at least until 2016, no Tennessee tax would ever be owed. A method for couples to solve this potential problem will be discussed in the next article.

As a practical matter, the danger of owing a tax when you own nothing or plan to give everything to your spouse will dissipate if you survive at least until 2015. In 2015, the inheritance tax exemption will equal $5,000,000, which will almost totally cover a gift of $5.12 million in 2012. In 2016, the problem totally disappears because the Tennessee inheritance tax will be gone.

The risk of incurring a Tennessee tax should be weighed against the potential reduction of federal transfer taxes by making a gift in 2012. As a general rule, we believe the potential federal tax benefits far outweigh the risk that you will incur some incremental Tennessee inheritance taxes.

In summary, if you make a large gift in 2012 and then die within three years, your estate may owe Tennessee inheritance taxes based on the gift. This danger should not stop you from making a gift that otherwise makes sense.

The Great 2012 Gifting Opportunity - Part 4: Will A Large Gift Demotivate Your Children?

Bryan Howard — Wed, 16 May 2012 08:33:21 -0600

This is the fourth article of a series designed to provide guidance for those individuals who are considering making a large gift in 2012 to take advantage of the $5.12 million federal gift tax exemption that will expire at the end of the year. For the first three articles in the series, see:

Part 1: Use It or Lose It,

Part 2: Can You Afford to Make a Large Gift?, and

Part 3: When Should You Make the Gift?

In addition to tax savings, gifts can provide a lot of positive benefits for the donees. For example, consider a child who is divorced and having to work two jobs to make ends meet. A gift might enable your child to give up the second job and spend more time with your grandchild.

Gifts also have potential downsides. A lot of our clients worry a great deal about the effect that a large inheritance will have on their children. They like the idea of their children being motivated to become productive members of society. They fear that their children may not reach their full potential if they do not have to work.

Heretofore, the primary time when this issue has been relevant was when our clients were planning their estates. Some clients create strict trusts in their Wills that match the child’s earnings from their work. Other clients choose to give most of their entire estate to charity, making only modest bequests to their children.

Our clients have not previously worried much about the effects of a large gift because federal and Tennessee gift taxes stopped them from making large gifts. However, the ability for a married couple to give $10.2 million without paying any federal or Tennessee gift taxes in the calendar year 2012 has caused our clients to focus on this issue.

If you are concerned that a large gift might negatively impact your children, you should make the gift to a trust and/or give noncontrolling interests in business entities. A trust helps in several regards. First, the trustee will be in control of investing the funds and making distributions. Second, Tennessee allows “secret” trusts. Your children do not have to know about the existence of the trust or the assets owned by the trust. You can designate a representative to receive any required notices concerning the trust. Third, if you are married, you should consider making your spouse the primary beneficiary of the trust. Your spouse can also be the trustee of the trust. Your children do not have to receive distributions from the trust. Fourth, your spouse or some other person can be given a power of disappointment that can be used to make changes to the trust in the future. For example, if one of your children “leaves the reservation”, that child could be disinherited as a beneficiary of the trust. Fifth, we generally recommend making the trust a grantor trust for income tax purposes. Even if your child receives a distribution from the trust, he or she will not receive a K-1 which might reveal information about the trust.

Another method for limiting the consequences of a gift is to give nonvoting stock, nonvoting interests in a limited liability company, or limited partnership interests. These assets are difficult to sell. Furthermore, the owners with voting control will determine the distribution policy of the company and the level of salaries paid to key officers. Your children may be rich on paper, but they will need to keep working if they want to put food on the table. Incidentally, these types of assets typically receive valuation discounts of 35% or more due to illiquidity and lack of control. The discount allows you to make a larger gift.

Making a large gift may lead to unintended consequences. You can minimize these consequences by giving particular types of assets or by making the gift to a properly designed trust.

Tennessee Repeals Gift Tax

Bryan Howard — Mon, 30 Apr 2012 16:56:58 -0600

In a surprising move, the Tennessee legislature has repealed Tennessee gift taxes, effective for gifts made on or after January 1, 2012. This is welcome news for a lot of our clients who plan to make a $5.12 million gift later this year. Our clients have been considering various ways to make their gifts without paying Tennessee gift tax. They will no longer have to worry about the gift tax.

Some of our clients knew that a change in the gift tax might occur later this year and have made large loans to their children. These clients will now consider forgiving the loans or giving other assets to their children.

Tennessee’s repeal of its gift tax leaves Connecticut as the only state that charges gift taxes.

The fiscal note for this bill estimated that it will cost the state approximately $15 million per year in revenue. I am sure that the revenue loss for 2012 will be a significantly higher amount due to the window of opportunity for making tax-free gifts at the federal level.

Tennessee Inheritance Tax Repealed

Bryan Howard — Fri, 27 Apr 2012 17:05:28 -0600

The Tennessee legislature repealed Tennessee’s inheritance tax, effective as of January 1, 2016. This means that if you can survive until 2016, you will not owe any Tennessee inheritance taxes. If you die before that date, you will owe taxes if your taxable estate exceeds the following exemption levels:

2012	$1,000,000
2013	$1,250,000
2014	$2,000,000
2015	$5,000,000

Since the tax still applies until 2016, Wills of married persons should still establish Tennessee QTIP Trusts. This will avoid tax at the first death. As long as the surviving spouse survives at least until 2016, the Tennessee inheritance tax will be permanently eliminated.

There are a lot of existing Tennessee QTIP Trusts (sometimes referred to as Tennessee Gap Trusts) for married individuals who died over the last few years or chose to make a gift to such a trust. These trusts are irrevocable and cannot be modified to add the children as beneficiaries or to change the income payout requirements for the spouse. Depending on the terms of the trust, it may be possible to distribute corpus of the trust to the spouse. Unfortunately, due to the instability of the federal estate tax laws, it would be imprudent to distribute assets from a TN QTIP trust to the spouse. As of January 1, 2013, the federal estate tax exemption is scheduled to be only $1 million. Distributing assets from the Tennessee QTIP Trust might increase federal estate taxes payable by the spouse’s estate.

The elimination of the Tennessee inheritance tax will eventually simplify estate planning for our clients. However, for the next four years, we must pay attention to this tax.

How Many Jobs Will Be Created by the Repeal of the Tennessee Inheritance Tax?

Bryan Howard — Fri, 06 Apr 2012 10:35:39 -0600

The potential repeal of Tennessee’s inheritance tax has once again drawn national attention. Last week, the Wall Street Journal published an article and a letter to the editor regarding this matter. This week, the Institute on Taxation and Economic Policy has published a scathing rebuttal of an analysis done by Arthur Laffer and Wayne Winegarden.

In stark contrast to the Laffer article, the ITEP article concludes that repealing the inheritance tax will not significantly increase jobs in Tennessee. I sincerely doubt that Governor Haslam and the legislature believe that repealing the inheritance tax will create 220,000 new jobs. Rather, they perceive the tax to be unfair and realize that some of our wealthiest citizens have left Tennessee to avoid the tax.

The Great 2012 Gifting Opportunity - Part 3: When Should You Make the Gift?

Bryan Howard — Thu, 05 Apr 2012 10:36:27 -0600

This is the third article of a series designed to provide guidance for those individuals who are considering making a large gift in 2012 to take advantage of the $5.12 million federal gift tax exemption that will expire at the end of the year. For the first two articles in the series, see Part 1: Use It or Lose It and Part 2: Can You Afford to Make a Large Gift?

If you plan to make a gift this year, there are three competing factors you need to evaluate relative to the timing of your gift. First, the sooner you make the gift, the sooner the donee can receive income and appreciation from the gift. Second, Tennessee gift taxes may be repealed. If you make the gift now, you would be sorry if Tennessee gift taxes are repealed for gifts made later this year. Third, we don’t know for sure that the $5.12 million federal gift tax exemption will remain intact for the remainder of the year. Therefore, waiting for a potential change in the Tennessee gift tax laws or for other reasons carries some minor risk that the federal law will be changed before you make the gift. You may remember a rumor last year that caused some of our clients to make their gifts prior to November 23, 2011.

The benefit of making the gift sooner rather than later has been recognized by a couple whom I assisted with an $8 million gift last fall. They have received the 2011 Tennessee gift tax bill from their CPA. It is approximately $737,000. Ouch!

About the time they received their gift tax returns, my clients heard the rumor that Tennessee is considering a repeal of its gift taxes. They were somewhat disappointed that they had not considered delaying their gift, though no one had any idea that Tennessee might repeal its gift taxes during 2012 when my clients made their gifts. However, a closer analysis showed that the family will be considerably better off by having made the gift last fall even if Tennessee repeals its gift taxes. The gift constituted interests in an LLC that primarily owned marketable securities. Due to extraordinary returns in the stock market, the value of the gift has increased from $8 million to $9.2 million, or an increase of $1.2 million. If Tennessee repeals its gift taxes later this year and my clients had waited until that time to make an $8 million gift, the trust for their children would only have $8 million rather than $9.2 million. Especially since the trust is a grantor trust, the extra $1.2 million is likely to increase more between now and the time of death of my clients. If my clients had waited to make the gift, they would have received the $1.2 million of income and appreciation, and they would not have paid the $737,000 of gift taxes. Thus, their personal net worth would be $1,937,000 larger. If you assume a 40% death tax rate on this $1.9 million at the time of the death of the survivor of my client, the children will end up in about the same place. However, this does not take into account the additional earning power of the trust for the children having $9.2 million as compared to having $8 million. This could provide a substantial benefit between now and the time of death of the survivor. Even though my clients’ timing may have been too quick due to Tennessee gift taxes, it was just right from the point of view of appreciation. This was not an accident. My clients suspected that stocks might be poised for a rally when they pulled the trigger on their gift.

The current advice that we are giving is to wait and see if the Tennessee legislature makes a change to its gift tax laws. We expect to know the answer by the middle of May. Meanwhile, there does not appear to be any movement at the federal level to repeal this year’s large federal gift tax exemption. This advice changes for clients who are able to make gifts that do not require the payment of Tennessee gift taxes and for clients who have an asset that may appreciate rapidly in the next few weeks.

When it comes to making a large gift, timing is everything. If you are ready to make a large gift, you should be making preparations but should consider delaying the gift until the Tennessee legislature concludes its legislative session for this year.

Don't Move to Florida Just Yet--Tennessee May Repeal Its Inheritance Tax

Bryan Howard — Mon, 02 Apr 2012 10:10:10 -0600

Over the last several years, several of our clients have changed their residences to Florida to avoid certain Tennessee taxes, including our inheritance taxes. Migration to avoid state inheritance taxes has also been occurring in other states.

Last week, the Wall Street Journal published an article about various states, including Tennessee, that are considering a repeal of their death taxes. The article states that “the main obstacle to reform in Nashville is GOP Governor Bill Haslam…”

Governor Haslam responded to the Wall Street Journal by writing a letter to the editor. In his letter, the governor points out that he has recommended repealing the taxes in the next three years and that he has worked with House Finance Committee Chairman Charles Sargent to completely repeal the taxes in four years. Indeed, the House Finance Subcommittee has recommended an amendment to House Bill No. 3760 that would increase the inheritance tax exemption to $1,250,000 in the year 2013, $2 million in the year 2014, $5 million in the year 2015, and would totally repeal Tennessee inheritance taxes beginning in the year 2016. I find it interesting that our state legislature has taken some lessons from recent federal tax cuts. If we can’t afford a tax cut now, phase it in so that the impact will be postponed to future years when revenue collections will hopefully be better. The danger with a phase-in approach is that it is easier for future legislatures to “change their mind.”

Normally, I would be skeptical that a bill with a large tax cut would survive the final budget cut. However, the governor’s unusual public support for the cut gives me reason to hope that this change will be made.

Top State Income Tax Rates

Bryan Howard — Tue, 06 Mar 2012 16:01:29 -0600

Tax Foundation has published a map showing the top income tax rates in all 50 states. There are seven states that have no income taxes at all: Alaska, Washington, Nevada, Wyoming, South Dakota, Texas, and Florida. Tennessee and New Hampshire only tax dividends and interest. Except for Iowa, the high tax states are on the coasts.

The Great 2012 Gifting Opportunity - Part 2: Can You Afford to Make a Large Gift?

Bryan Howard — Mon, 05 Mar 2012 18:44:32 -0600

This is the second article of a series designed to provide guidance for those individuals who are considering making a large gift in 2012 to take advantage of the $5.12 million federal gift tax exemption that will expire at the end of the year. For the first article in the series, see Part 1: Use It or Lose It.

Prior to 2011, clients seldom made gifts of several million dollars unless they were very wealthy. Due to the temporary expanded gift tax exemption, clients who are not so wealthy are considering gifts worth several million dollars. If you have $100 million, you might not miss the income that you will lose if you make a gift of $5 million. However, what if you have $20 million, or $8 million? The income you lose from a gift of $5 million might easily impact your lifestyle choices. Everyone has their breaking point.

Several of our clients who really cannot afford to lose the income from a gift have nevertheless made large gifts to take advantage of the temporary higher gift tax exemptions. In order for the gift to be prudent, our clients have taken several different approaches. One approach is to create more cash flow from another source prior to making a gift. Assume that you are 85 years old and you would like to have guaranteed cash flow of $200,000 per year. Also assume that your children, or a trust that you previously established for their benefit, are financially secure. You could transfer $1,157,000 of cash to your children or the trust in exchange for their obligation to pay you $200,000 per year for the remainder of your life. This transaction will not be considered a gift because the present value of the annuity payments that you are receiving equals the amount of property you are transferring to your children. After implementing the private annuity, you are then free to make a gift of other assets without worrying about losing the income from the assets that you gift.

Many of our clients have given away nonvoting interests in entities such as limited liability companies, limited partnerships, and corporations. By retaining voting control of these companies, our clients have the ability to pay themselves reasonable salaries for the services that they provide to the companies.

A very popular approach that our clients are using is to make a gift to a spousal access trust. There are two general types of spousal access trusts. One is a trust which includes your spouse and descendants as discretionary beneficiaries of the trust. Often the spouse serves as the trustee of the trust. Since your spouse has the ability to access income from the trust, you should be more comfortable about making gifts.

The other type of spousal access trust is a marital trust, which does not include your descendants as beneficiaries. As will be discussed in a later article, this trust can also be used to avoid the payment of Tennessee gift taxes on the trust.

The “flaw” with gifts to spousal access trusts is the danger that your spouse could predecease you. In that case, income from the trust will not be available for your benefit. Some of our clients have been willing to take the gamble that their spouse would not predecease them by a long period of time. Perhaps the donee spouse is younger and/or in better health than the donor spouse. Another factor to keep in mind is that your expenses will go down when one spouse dies because there is only one mouth to feed.

Another option when the donee spouse is young enough and healthy enough is to purchase life insurance on the life of the donee spouse. If the donee spouse dies too soon, the life insurance could provide a source of funds for the donor spouse.

Another hedging technique is to have each spouse make a gift to a spousal access trust for the other spouse. There is a tax concept known as the reciprocal trust doctrine, which requires careful planning if both spouses intend to establish spousal access trusts.

Another aspect of increasing your cash flow is to decrease your expenses. A lot of our clients have established grantor trusts that allow them to pay income taxes on income earned by the trust. This basically allows them to make tax-free gifts to their children. Generally, these grantor trusts have been designed to allow the grantor to discontinue paying income taxes in the future. When you have the opportunity to “turn off” a grantor trust, you need to factor this into your cash flow planning.

Another factor that affects your expenses is whether you will pay Tennessee gift taxes. Future articles will discuss various ways to make gifts without paying Tennessee gift taxes. When there is pressure on your cash flow, it might be preferable to make gifts in a manner that does not require you to pay Tennessee gift taxes. The Tennessee gift taxes “saved” can be used to shore up the income lost from the assets that you give away.

Before making a large gift, you need to be totally comfortable with your future access to cash flow.

Tennesseans Against Death Taxes

Bryan Howard — Mon, 05 Mar 2012 14:34:55 -0600

A group known as Tennesseans Against Death Taxes is lobbying the Tennessee government to repeal Tennessee gift and inheritance taxes. Tennessee is one of only two states that charge gift taxes. Our state gift tax roadblocks a lot of good estate planning that could otherwise be done, with the result that families pay significantly more federal estate taxes. A number of our clients have moved to Florida to avoid these taxes and the Tennessee Hall income tax.

If you would like the Tennessee gift and inheritance taxes to be repealed, you should consider contacting your representatives in the near future. Enclosed are a sample letter in Word and PDF, a list of Senate and House contacts, and an economic study prepared by Art Laffer, a former economic advisor to President Reagan.

The Great 2012 Gifting Opportunity - Part 1: Use It or Lose It

Bryan Howard — Mon, 27 Feb 2012 17:52:26 -0600

In the calendar year 2012, individuals can give away as much as $5,120,000 without paying federal gift taxes. This amount is reduced by taxable gifts that were made in prior years. The gift tax exemption will decrease to $1 million on January 1, 2013, unless Congress changes this law. President Obama favors the planned reduction to $1 million.

If you fail to make a gift this year and the exemption reverts to $1 million as scheduled, there are 2 unfavorable consequences. First, you hamper your ability to help your children without paying federal gift taxes. Second, you may owe significantly more estate taxes upon your death or upon the subsequent death of your spouse.

During 2011 and for the first two months of 2012, we have been working with a number of our clients regarding this opportunity. The process involves much more than just writing a check. Among the issues that our clients are grappling with are the following:

Can you afford to make the gift? Said differently, is there a chance that you will run out of money if you make the gift?
Are you prepared to pay Tennessee gift taxes? There are several ways to make gifts without paying Tennessee gift taxes; however, these techniques are often impractical.
What impact will the gift have on your children?
What assets should be given?
Are you willing to give up control of the assets you are transferring?
Should you transfer “discounted” assets such as fractional interests in real estate or interests in corporations, LLCs, or limited partnerships?
Should you make the gift to a trust rather than directly to the recipient? Most of our clients have decided to use a trust.
If you use a trust, what are the provisions regarding trustees and distributions?
If you use a trust, should you allocate generation-skipping transfer tax exemption to the trust? The answer is usually yes.
How will the gift impact your overall estate plan?
When should the gift be made?

Even though our clients have unique circumstances, we have seen patterns emerge as to how they have chosen to deal with these various issues. We will be publishing a series of articles that will hopefully help you to navigate these issues.

IRS Grants Extension for Making Estate Tax Portability Election

Bryan Howard — Fri, 17 Feb 2012 17:04:00 -0600

Portability allows a surviving spouse to benefit from his/her spouse’s unused federal estate tax exemption. A portability election is made by filing a federal estate tax return within 9 months after the decedent’s death, or within 15 months after the decedent’s death if an extension is requested within the first 9 months.

A number of estates of decedents who died in the first few months of 2011 failed to take advantage of the portability election due to confusion over this new provision and delayed IRS guidance. In light of the confusion, the IRS has decided to allow certain estates to make the election even if they missed the deadline.

Estates of decedents who died during the first six months of 2011 may make the portability election as long as they file Form 706 within 15 months after the date of the decedent’s death. For example, if the decedent died on January 2, 2011, a Form 706 needs to be filed no later than April 2, 2012. This limited group of estates could make the election even though an extension of time to file was not requested.

At this time, we do not know for sure that the surviving spouse will benefit from portability. As the law is currently written, the surviving spouse will only benefit if he or she dies before December 31, 2012 and would otherwise owe federal estate taxes. Generally, this means that they must have an estate over $5.12 million. Current law eliminates the benefit of portability for surviving spouses who die on January 1, 2013 or later. Even though very few will benefit from the law as currently written, we are still recommending that you make the portability election. President Obama’s budget proposal recommends that portability be extended permanently. Furthermore, portability has widespread support in both houses of Congress.

If you are the Executor of the estate of a married person who died after December 31, 2010, you should consider filing Form 706 to make the portability election even though a Form 706 does not otherwise have to be filed.

President's Budget Proposal Would Significantly Increase Estate and Gift Taxes

Bryan Howard — Tue, 14 Feb 2012 17:59:58 -0600

If you ever want to find out the estate planning techniques that are saving the most estate taxes, take a look at a Democratic President’s wish list for making changes to estate and gift taxes. President Obama’s fiscal year 2013 budget proposal recommends numerous changes that would significantly increase estate and gift taxes.

The headlines deal with exemptions and rates. Currently, the estate, gift, and GST exemptions are at $5,120,000. The President wants to reduce the estate and GST exemptions to $3,500,000 and the gift tax exemption to $1,000,000. He wants to increase the rate for estate, gift, and GST taxes from 35% to 45%.

On the good side, the President wants to make portability permanent. Portability allows a surviving spouse to use the deceased spouse’s unused estate tax exclusion.

Though the changes to the exemption levels and rates are significant, there are a number of other changes that will cost some taxpayers even more in taxes than the changes in rates and exemption levels.

The President wants to make it significantly harder to claim valuation discounts for family limited partnerships. This provision was on President Clinton’s wish list for the last few years of his presidency and resurfaced after President Obama became president. To date, Congress has paid little attention to this recommendation.

The President wants GRATs to have a minimum term of 10 years. This proposal has also been around for 2 or 3 years. Congress has shown some interest in enacting this provision, though there are no current bills of which I am aware.

The President wants to eliminate the use of long-term dynasty trusts to evade GST taxes. His proposal would eliminate GST protection for trusts after 90 years. Trusts created before the enactment of such a rule would be “grandfathered” from this tax so that they could continue to be protected.

Perhaps the most troubling proposal is a new provision that would coordinate income and transfer tax rules applicable to grantor trusts. Under this proposal, assets in a grantor trust would be included in the estate of the grantor for estate tax purposes. Distributions from the trust to the beneficiaries of the trust during the grantor’s life would be subject to gift tax. If the trust is converted from a grantor trust to a non-grantor trust during the grantor’s lifetime, all assets in the trust would be subject to gift tax at the time of the conversion. These rules would apply for trusts created on or after the enactment date and with regard to any portion of a pre-enactment trust attributable to a contribution made on or after the enactment date. My initial reaction to this proposal is that it is totally unworkable and will never be enacted.

For the sake of our clients, I hope that these various proposals are not enacted. They are the heart and soul of the techniques that we use to help our clients transfer more of their assets to their loved ones. However, even if they outlaw these techniques, we will find new ones.

Comparison of Asset Protection Trust Statutes

Bryan Howard — Tue, 07 Feb 2012 12:40:53 -0600

Dave Shaftel has prepared a detailed comparison of the various Domestic Asset Protection Trust statutes. He analyzes 33 different aspects of the statutes. Tennessee’s laws stack up very well in terms of protection from creditors.

You can see from the enclosed map that Tennessee is the only southeastern state that allows Asset Protection Trusts. Advisors in neighboring states are beginning to recommend Tennessee as the state in which to establish an Asset Protection Trust.

Delaware is the leading provider of Asset Protection Trusts because they have done the best job of advertising. Unlike Tennessee, Delaware allows certain tort claimants to assert claims against Asset Protection Trusts. Except for this significant difference in Tennessee’s favor, the Delaware and Tennessee statutes are very similar.

Groundhog Day: A Good Reminder to Make Gifts Before the Sun Shines

Bryan Howard — Fri, 03 Feb 2012 11:51:15 -0600

Yesterday was a beautiful day in Nashville. Supposedly, that means we’re in for six weeks of miserable weather. Whether or not we receive all of this dreary weather, we expect the sun to be shining bright in spring and summer.

Like the groundhog, a lot of our clients are able to forecast future conditions for their businesses. We encourage our clients to consider their estate planning when conditions are still cloudy, but the future looks bright.

Yesterday, I met with a business owner whose business struggled during the Great Recession. The tide is beginning to turn, and my client believes the business will become very profitable in the next three to five years. Now is a great time for him to make gifts of company stock to a trust for his children. Due to poor earnings for the last three years, an appraiser will put a very low value on the stock. If the stock performs well in the future, the value of the stock will belong to the trust and not to my client. If the stock does not perform well, then my client will only have a modest estate tax problem. His real vulnerability to estate taxes is the possibility that the business will become very valuable while he still owns it.

Prior to making the gift, we will recapitalize the company stock so that 99% of the stock is non-voting and 1% is voting. My client will transfer all of his non-voting stock to a trust for his son and daughter, and he will retain all of the voting stock. This will enable him to control corporate policy, including the salary that he pays to himself.

Gifts should be made when the future is uncertain, but there remains a possibility of sunny weather ahead. Apparently this is the technique that Mitt Romney used to establish a trust fund for his children that is now worth $100 million without paying any gift taxes. Mr. Romney must have given assets to the trust before they blossomed into full value. It is really quite easy to do as long as you are willing to make gifts before the business becomes valuable. There are numerous techniques for transferring assets in a tax efficient manner after they become valuable. None of these techniques are as good as making gifts before the assets become valuable.

Tennessee: Third Best State for Taxes

Bryan Howard — Tue, 24 Jan 2012 12:10:57 -0600

Bloomberg has published an article which concludes that Tennessee has the third lowest taxes of any state in the country. It is somewhat surprising to me that the two states that are ahead of Tennessee both have a state income tax. Mississippi has a 5% income tax, and South Carolina has a 7% income tax.

A lot of my clients feel like they are heavily taxed by Tennessee due to the Hall income tax on dividends and interest as well as gift or inheritance taxes upon transfers of wealth to younger generations. Several of our clients have moved to Florida to avoid the Hall tax, the gift tax, and the inheritance tax. It is somewhat ironic that Florida is not ranked in the best 5 states due to its heavy property taxes.

As usual, there are numerous bills before the Legislature to reduce or eliminate the Hall tax and gift and inheritiance taxes. Lets hope that some of these bills are enacted so that we can take over the #1 ranking.

40 Tennesseans Paid Federal Estate Taxes in 2010

Bryan Howard — Sat, 26 Nov 2011 15:02:23 -0600

Citizens for Tax Justice has published an article which lists the number of residents of each state who paid estate taxes between the years 2000 and 2010. In 2000, there were 662 Tennesseans who paid estate taxes. This represented 1.2% of all the Tennesseans who died during the preceding year. This number gradually decreased during the following decade until only 40 Tennesseans paid taxes in 2010. This represented 0.1% of the Tennesseans who died in 2009.

The number of Tennesseans who will pay federal estate taxes in 2011 should be even less due to the one-year repeal of estate taxes for decedents dying in 2010.

Even though the number of estates paying federal estate taxes has declined, the number of estates paying Tennessee inheritance taxes has remained constant. Tennessee has not changed its estate tax laws since the 20th century. The Tennessee inheritance tax exemption is only $1 million.

Citizens for Tax Justice advocates decreasing the estate tax exemption. It supports a proposal introduced by Congressman McDermott named “The Sensible Estate Tax Act of 2011.” This proposal would reduce the federal estate tax exemption from $5 million to $1 million per person. Fortunately, noone expects this Act to be approved.

Will the $5 Million Gift Window Close Early?

Bryan Howard — Fri, 04 Nov 2011 12:47:04 -0600

Unconfirmed rumors are circulating that the Super Committee may propose to reduce the current $5 million gift tax exemption to $1 million, potentially effective as early as November 23, 2011. It seems unlikely to me, but the rumor could be based upon “leaks” from insiders who are familiar with the Super Committee deliberations.

A lot of our clients have already made their $5 million gifts. Others are taking their time and studying their options. A couple of our clients who were studying their options are now mobilizing to complete their gifts prior to November 23, 2011.

If you are concerned about a potential law change but will not be able to complete your gift by November 23, 2011, there is one technique that you should consider. An inter vivos QTIP trust would allow you to beat the law change, if there is one, yet provide you with the flexibility to unwind the transaction if there is no law change. Assume that Husband makes a $4 million gift to a marital trust that benefits Wife for her lifetime and then continues in trust for the benefit of their children. If the Super Committee does not change the law, and the gift tax exemption remains in place until December 31, 2012, the marital trust will be liquidated and the assets will be distributed to the wife. The couple will then decide how to best use their $5 million gift tax exemption. If this course is followed, Husband will need to file Tennessee and federal gift tax returns on April 15, 2012 (or October 15, 2012 with an extension), and make QTIP elections on both returns.

Alternatively, if the $5 million gift tax exemption is eliminated as of November 23, 2011, the QTIP trust will stay in place and the husband’s federal gift tax return for 2011 will not make a QTIP election. The Tennessee gift tax return for 2011 will still make a QTIP election in order to avoid paying Tennessee gift taxes for 2011.

The QTIP plan will allow the husband to utilize his gift tax exemption but does not allow the wife to utilize her exemption. If the wife establishes a similar $4 million trust for the husband, there is a danger that the reciprocal trust doctrine will eliminate all of the proposed benefits from the transaction. In theory, the separate trusts for the husband and the wife can have different provisions that will avoid the application of the reciprocal trust doctrine. However, it is my opinion that there is still some risk if they each establish trusts that benefit the other, especially since the two trusts will be created very near in time to each other. Accordingly, I do not recommend the establishment of QTIP trusts by both spouses.

I am very skeptical about Congress closing the gift tax window as of November 23, 2011. Nevertheless, you might as well consider acting before that date if you are committed to making a gift anyway. An inter vivos QTIP trust is one method for hedging your bets.

Portability Is Not a Worthwhile Planning Option

Bryan Howard — Thu, 03 Nov 2011 15:37:15 -0600

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 authorized portability of the federal estate and gift tax exemption for married couples. This means that if one spouse dies without having used his or her entire exemption, the survivor may use it.

Portability has been widely hailed as a great estate planning benefit. The benefit is that the first spouse to die can leave everything to the survivor rather than having to create a credit shelter trust.

Our view is that the benefit of portability is overrated; furthermore, it creates a trap for the unwary. We are not advising any of our married clients to plan on using portability.

The foremost reason that we do not favor portability is because the statute that created it also required the law to expire on December 31, 2012. President Obama and many members of Congress have indicated that they would like to extend portability beyond this sunset date; however, we have learned that it is foolhardy to plan on the assumption that future tax laws will be consistent with sensible statements made by politicians.

Even if portability is made “permanent” by future legislation, there are many pitfalls to using portability. First, there is no inflation adjustment. For example, assume a married man dies this year and leaves his entire $5 million estate to his wife. When the wife dies, she will be able to use her husband’s unused exemption, but without any adjustment for inflation. If the husband had placed the $5 million in a credit shelter trust instead of transferring it to his wife, appreciation of the value of the trust during his wife’s remaining lifetime would have also escaped estate taxes.

The Tennessee inheritance tax exemption is not portable. If you fail to use the exemption in the estate of the first spouse to die, it will be lost forever. This will result in higher Tennessee inheritance taxes for the survivor’s estate.

Those who plan to establish trusts that last for the lifetimes of their children and beyond, are concerned about generation-skipping transfer tax exemption. The GST exemption is not portable. However, if the first to die establishes a trust and allocates GST exemption to the trust, the trust will be exempt from generation-skipping taxes for up to 360 years.

In order to claim portability, the estate of the first spouse to die must file a timely federal estate tax return. I predict that a lot of surviving spouses who are not otherwise required to file an estate tax return will fail to file timely returns in order to claim portability.

There are numerous portability issues associated with the remarriage of the surviving spouse. It will likely take years for regulations and court cases to fully flesh out these issues. All things considered, we recommend that you disregard portability as a planning tool, at least until the law is made permanent.

Have You Ever Needed a Copy of Your Tax Return from a Prior Year?

Bryan Howard — Tue, 01 Nov 2011 11:24:34 -0600

See below for a helpful tax tip from the IRS.

Taxpayers sometimes need tax returns from previous years for loan applications, to estimate tax withholding, for legal reasons or because records were destroyed in a natural disaster or fire. If your original tax returns were lost or destroyed, you can obtain copies or transcripts from the IRS. Here are 10 things to know if you need federal tax return information from a previously filed tax return.

There are three options for obtaining free copies of your federal tax return information – on the web, by phone or by mail.
The IRS does not charge a fee for transcripts, which are available for the current and past three tax years.
A tax return transcript shows most line items from your tax return as it was originally filed, including any accompanying forms and schedules. It does not reflect any changes made after the return was filed.
A tax account transcript shows any later adjustments either you or the IRS made after the tax return was filed. This transcript shows basic data, including marital status, type of return filed, adjusted gross income and taxable income.
To request either transcript online, go to www.irs.gov and use our online tool called Order A Transcript. To order by phone, call 800-908-9946 and follow the prompts in the recorded message.
To request a 1040, 1040A or 1040EZ tax return transcript through the mail, complete IRS Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Businesses, partnerships and individuals who need transcript information from other forms or need a tax account transcript must use the Form 4506T, Request for Transcript of Tax Return.
If you order online or by phone, you should receive your tax return transcript within five to 10 days from the time the IRS receives your request. Allow 30 calendar days for delivery of a tax account transcript if you order by mail.
If you still need an actual copy of a previously processed tax return, it will cost $57 for each tax year you order. Complete Form 4506, Request for Copy of Tax Return, and mail it to the IRS address listed on the form for your area. Copies are generally available for the current year and past six years. Please allow 60 days for actual copies of your return.
The fee for copies of tax returns may be waived if you are in an area that is declared a federal disaster by the President. Visit www.irs.gov, keyword “disaster,” for more guidance on disaster relief.

Visit www.irs.gov to determine which form will meet your needs. Forms 4506, 4506T and 4506T-EZ are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).