Now is the Time for All Good Estate Planners to Come to the Aid of Their Clients!: Estate Planning Opportunities in 2012

Posted February 7, 2012 by Ashley Alderman
Categories: Estate Planning, Presentations, Tax

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 By Ashley Alderman

On January 25, 2012, Scot Kirkpatrick and I spoke about how clients can utilize the current gift, estate, and generation-skipping transfer tax laws and $5.12 million exclusion amount in 2012 to their advantage, particularly given the increasing likelihood that as of January 1, 2013, we will again be back to a $1 million gift and estate tax exemption with a 55% tax rate and a 5% surcharge on estates in excess of $10 million.  After reviewing the current state of the law, we also discussed the lingering questions surrounding the estate tax law, primarily dealing with the concept of portability of the unused spousal exclusion amount and the potential for “claw back” if an individual makes gifts in 2012 utilizing the current $5.12 million exclusion amount, but then the individual dies in a year when the exclusion amount is less than the amount the individual already gave away.  There is the potential that when the individual dies, his estate will owe estate taxes on those prior gifts.  Despite the uncertainty and this claw back risk, maximizing use of the $5.12 million exclusion amount in 2012 is still a very attractive option for some clients.  One reason is that many practitioners believe that some form of administrative or legislative relief would be provided.  Although there is not unanimity among all commentators, another reason is that even if the claw back applies, the total amount of taxes paid by the client and his estate would be lower if the gifted assets appreciate in value because the assets, along with any appreciation on such assets, are removed from the gross estate.

Following the explanation of the current law, and the uncertainties in the current law, we discussed multiple estate planning opportunities for clients in 2012, in particular those to utilize their $5.12 million exclusion amounts.  Some of the strategies discussed include:

  1. Outright gifts;
  2. Decanting assets in existing trusts into new trusts;
  3. Grantor Retained Annuity Trusts;
  4. Business Restructuring, including the formation of Family Limited Partnerships and “Estate Freezes,” including gifts and sales to intentionally defective grantor trusts;
  5. Captive Insurance Companies;
  6. Forgiveness or refinancing of outstanding promissory notes or loans;
  7. Additional gifts to Irrevocable Life Insurance Trusts to facilitate the purchase of additional life insurance policies or increased death benefit on existing policies;
  8. Qualified Personal Residence Trusts; and
  9. Charitable Lead Annuity Trusts.

As we repeatedly emphasized to those in attendance, this is the year to “use it or lose it!”   Many of these strategies need to be implemented in the beginning of the year in order to be completed by the end of 2012.  If you or a client may benefit from some of these estate planning opportunities, we will be glad to discuss them in more detail with you.

IRS Guidance Anticipated for Tax Effects of Trust Decanting

Posted January 25, 2012 by Rose K. Wilson
Categories: Estate Planning, Gift Taxes, Income Tax, Tax, Tax Returns

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 By Rose Drupiewski

The IRS announced that it would place the issue of trust “decanting” on its priority list of items to focus on in 2011 and 2012 for purposes of providing taxpayer guidance.   Decanting occurs when a trustee, pursuant to authority provided in the trust agreement or under state law, transfers property from one trust to another.  Decanting powers have recently become popular with trust drafters as a way to provide additional flexibility to trustees when managing trust assets on behalf of beneficiaries.

The reason for the popularity of decanting powers is that such powers can provide flexibility to otherwise inflexible irrevocable trust agreements.  For example, if a trust agreement provides for an outright distribution of assets to a trust beneficiary at age 25 and the trustee has determined that the beneficiary lacks enough maturity at that age to handle a large distribution, the trustee could (if permitted under the trust agreement or state law) transfer the assets to another trust for the benefit of such beneficiary that will not terminate at age 25 but at a later date.

Although decanting can be extremely useful from the standpoint of flexibility, such flexibility may come with undesirable tax consequences.  The gift, estate, GST and income tax consequences of decanting are less than clear.  For example, there has been some concern that the presence of a decanting power may transform an otherwise irrevocable trust into a revocable trust for estate tax purposes, thus causing the assets in the trust to be included in the grantor’s gross estate.  This is obviously an undesirable consequence because many irrevocable trusts are created for the purpose of enabling a grantor to make gifts to family members in trust without causing estate tax inclusion.  There is also some concern as to whether, if the trustee is a beneficiary of the trust, the trustee’s decanting power might be deemed a general power of appointment for estate tax purposes, which might cause unwanted estate tax consequences for the trustee.  These are just a few examples of multiple unresolved gift, estate, GST and income tax issues relating to trust decanting powers.  Because of the lack of clarity regarding the tax effects of decanting and the hope for favorable guidance, the IRS’s announcement is welcome news for many tax planners and their clients.

In connection with the IRS priority plan, the IRS has recently requested comments from the general public regarding the tax implications of decanting powers.  Comments should be submitted to the IRS by April 25, 2012.

Resolving to Succeed

Posted January 12, 2012 by Jeff Waddell
Categories: Asset Protection, Estate Planning, Gift Taxes, Tax

 by Jeff Waddell

The end of the year and beginning of the new year is a time when many of us reflect on that which has passed and that which is to come.  Resolutions are made regarding exercise, fiscal responsibility and other personal items.  Personal health is a primary theme in this introspective endeavor, but for the business owner, what about the long-term health of your business?

An often quoted and almost equally often overlooked adage says that “failing to plan is planning to fail.”  While that sentiment is true during our lifetimes, just stop for a moment and consider what happens when a small business owner does not have a business succession plan in place.  More often than not, the next generation was either not involved in the business or not ready to “take command.”  If proper planning has not occurred, the estate tax burden on the estate of the deceased business owner could cripple the business moving forward.  Do not let this happen to your business.

Take the time to review the health of your business and determine your goals for the business after you retire, in one form or another.  Once you have a general plan, visit with your accountant and estate/business planning attorney to refine your goals through a variety of available vehicles including trusts, corporate restructuring, stock sales, and many others, to achieve a clear cohesive plan of action and begin to implement it.  Hopefully you will “tone those abs” in 2012, but also take the time to resolve to succeed for your business this year.

Karen Kurtz in the November Journal of Taxation

Posted December 21, 2011 by TrustandEstateBlawg
Categories: Uncategorized

Tax attorney Karen S. Kurtz in the Atlanta Chamberlain Hrdlicka office recently co-authored “Using Closed-Ended Funds to Calculate the Lack-of-Control Discount for Closely Held Businesses” which was published in the Journal of Taxation, Nov 2011.  An expert from the article follows:

The discount (or, in some cases, premium) that the market has applied when valuing closed-end mutual funds has been used as part of the process of calculating lack-of-control discounts for closely held business interests having similar assets to those funds. Nevertheless, the differences between the two types of entities may undercut the reliability of the CEF discount as a benchmark and justify an adjustment.

 An important valuation issue is the trend of applying discounts (and premiums) applicable to closed-end mutual funds (CEFs) to measure lack-of-control discounts for unmarketable, noncontrolling interests in closely held businesses, especially investment partnerships. Many tax advisors are not aware of the ramifications of solely using discounts applicable to CEFs to determine such lack-of-control discounts. As analyzed below, advisors and appraisers should consider whether the managerial and financial differences between CEFs and closely held businesses owning similar assets should result in a higher lack-of-control discount for closely held businesses than for CEFs.

Charles E. Hodges II and Karen S. Kurtz, Using Closed-End Funds to Calculate the Lack-of-Control Discount for Closely Held Businesses, 115 Journal of Taxation No. 05 (Nov. 2011).  The full article can be viewed in the Journal of Taxation or on Checkpoint.

Jingle Bells or Ringing Out the Year Gone By – Time Is Short to Complete Annual Planning

Posted November 14, 2011 by Jeff Waddell
Categories: Asset Protection, Charitable Giving, Estate Administration, Estate Planning, Gift Taxes, Income Tax, Presentations, Tax, Tax Returns

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 by Jeff Waddell

Each year at this time our section of the office begins to get really busy.  Clients we have reached out to all year but who have not responded suddenly begin appearing.  Yes, its year end annual gifting time.  Pay heed to the sounds of the approaching holiday season, for in all the merriment those sounds signal the last days to take advantage of annual exclusion gifting or the last opportunity to capture a loss to offset a gain in the same tax year.

Take the opportunity to be proactive.  Review what you have done and what can, or should, be done before year-end.  Be aware that the annual gifting exclusion for each individual is currently $13,000.  Consider consulting your accountant (now is a relatively quiet period for them) to determine whether you are likely to experience an unpleasant April surprise on your tax bill and if so what might help offset that unwanted occurrence.  Then give your estate planning attorney a call to discuss what needs to occur before year end.

Just as with holiday giving, estate planning gifts come in all shapes and sizes.  Annual gifting is something, as the name implies, to consider every year.  This year and next, unless and until the law changes, larger opportunities exist than ever before in the gifting arena (with lifetime $5 million dollar gifting exemptions) so, if your current financial situation allows, consider making it a truly memorable holiday season for yourself and your loved ones.

Tweeting from the Grave: The Benefits of Virtual Asset Instruction Letters

Posted November 10, 2011 by Erica Opitz
Categories: Asset Protection, Estate Planning

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 By Erica Opitz

In a world that is increasingly virtual, assets that exist solely on a person’s computer or the internet can be just as important as the tangible assets in a decedent’s estate.  In a 2007 research study,[1] it was determined that internet use in the age group over 71 was a mere 29%, while internet use for Baby Boomers was almost 80%, and for people 30 and younger, internet use exceeded 90%.

Your virtual assets are the “electronic information stored on a computer or through computer-related technology.”[2]  Think about bank account statements and other electronic account statements, your email accounts, social media accounts, or even photographs and home videos that you store on your computer or an internet site.  What happens to this virtual identity upon your death?  At death, each of these accounts and the information stored within them are an asset that must be dealt with by your personal representative and/or trustee.  Arguably, in our virtual world, in order to meet the prudent person standard, personal representatives and trustees must deal with these virtual assets or hire an agent whom is capable of dealing with them.[3]

So how do decedents make it easier for their fiduciaries to handle these virtual assets in the way the decedent would prefer?  A Virtual Asset Instruction Letter allows the decedent to identify all virtual assets by listing all online accounts and other virtual assets and provides web addresses, user names, and passwords as well as instructions on what to do with and who to give access to these assets upon the decedent’s death.  For example, these instructions could specify that the testator would like all of the photographs on his/her computer to be copied and given to multiple beneficiaries.  The Virtual Asset Instruction Letter could also instruct the fiduciary to close an account after a certain amount of time or to delete personal and credit card information that may be stored on different websites.  These types of instructions can help prevent the theft of the decedent’s identity.  This instruction letter could also be used upon the incompetency of an individual by referencing the letter in a power of attorney document.

In order to grant specific authority to a fiduciary to manage the testator’s virtual assets, a provision in the testator’s will, such as the following, could be used.

I may leave with this Will a letter signed by me and prepared in accordance with ________ law designating those certain Virtual Assets (as hereinafter defined) I may own at the time of my death be given to the persons named therein, and I direct my Executor to distribute such property at the time of my death in accordance with the terms and provisions of that letter.  For purposes of this Will, a “Virtual Asset” shall mean any intangible personal property which is stored and/or accessed by any electronic means whatsoever, whether on a personal computer, computer network, portable electronic storage device or media, or through and/or over the internet.

Upon my death, my Executor may take such actions as are reasonably necessary and prudent to locate, administer, transfer, and distribute any Virtual Asset which I may own or otherwise possess rights to at the time of my death.  Without limiting the generality of the foregoing, my Executor is authorized: (a) to hire and reasonably compensate computer or other technical experts to assist my Executor with respect to any Virtual Asset; (b) to change passwords or other means to access and/or control any Virtual Asset; (c) to take such actions as my Executor shall deem necessary to protect the security and continued accessibility of any Virtual Asset; and (d) to communicate with any software licensor, internet service provider, or other third party in connection with the location, administration, transfer, or distribution of any Virtual Asset.

In a day and age where our lives are leaving less and less of a paper trail and are increasingly lived online, it is important to protect our virtual assets upon death.  Not only will a Virtual Asset Instruction Letter ensure that the fiduciary has the information to access necessary accounts making the fiduciary’s job easier, but it will also ensure that the decedent’s intentions are carried out with respect to his/her virtual assets while protecting the virtual identity of the decedent.


[1] Estabrook, Pew Internet & Am. Life Project and Graduate Sch. of Libr. & Info. Science, U. of Ill. At Urbana-Chapman, “Information Searches That Solve Problems: How People Use the Internet, Libraries and Government Agencies When They Need Help” (2007).

[2] Walker, Michael and Victoria Blackly, “Virtual Assets”, 36 Estates, Gifts and Trusts Journal 253 (2011).

[3] See id.

Updates on the 2010 Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act

Posted November 1, 2011 by Ashley Alderman
Categories: Uncategorized

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 By Ashley Alderman

On October 20, 2011, the IRS announced in a news release (IR-2011-104) that the estate tax basic exclusion will increase from $5 million to $5.12 million in 2012 because of inflation adjustments that were included in the 2010 Tax Relief Act. The 2010 Tax Relief Act included these annual inflation adjustments, which was an addition to any prior estate tax laws that were not indexed to inflation. Although the estate tax basic exclusion is increased due to inflation, the annual exclusion forgifts will remain at $13,000.

In addition, IRS Notice 2011-82, released at the end of September 2011, had requested comments for the proposed regulations to section 2010(c).

On October 21, 2011, The New York State Society of Certified Public Accountants filed its comments on IRS Notice 2011-82. The New York CPAs stated that their “primary objective is to propose solutions to eliminate the significant degree of uncertainty that a surviving spouse would otherwise face concerning the use of the [Deceased Spousal Unused Exclusion Amount] if he or she were to remarry after the executor of the deceased spouse’s estate has made a portability election under section 2010(c)(5)(A)(a “portability election”).” In particular, the New York CPAs proposed four situations that required clarification in the proposed regulations:

1. Guidance is Required Where the Wife Remarries After the Death of Husband 1 (For Whom a Portability Election Has Been Made), and Husband 2 Then Dies Without a Portability Election Being Made for Husband 2

2. The Surviving Spouse Should Be Treated as Using Her Deceased Spousal Unused Exclusion Amount First Before Using Her Basic Exclusion Amount

3. Guidance is Needed to Clarify That Neither Estate Tax Nor Gift Tax Can Result Through a “Clawback” of the Deceased Spousal Unused Exclusion Amount

4. The Proposed Regulations Should Clarify that the Scope of the Service’s Examination of the Estate Tax Return of the First Spouse to Die Is Limited to Determining the Amount of the Deceased Spousal Unused Exclusion Amount

On October 21, the same day that the New York CPAs responded to IRS Notice 2011-82 with their comments for the proposed regulations to section 2010(c), Catherine Hughes, attorney-adviser in Treasury’s Office of Tax Legislative Counsel stated that Treasury would like to release proposed regulations on the portability of the estate tax exclusion under section 2010(c) in the 2010 Tax Relief Act by the end of 2011. Until the proposed regulations are released several areas remain uncertain, and executors of decedents dying in 2011 should seek advise when deciding whether and how to complete an estate tax return.