Wills, Trusts & Estates Prof Blog

New Case: Kristoff v. Centier Bank

Kristoff v. Centier Bank establishes that generation-skipping transfer tax exempt trust cannot be terminated merely because current beneficiary does not have descendants.  Ten years after a mother’s death, one of her daughters petitioned the court to terminate the trust created for her on the grounds that the trust was created to preserve the GST tax exempt amount for the mother’s grandchildren, and that because she and her sister had no children nor ever would, the trust should be terminated under state law which authorizes the court to direct deviation from the terms of a trust and to modify administrative or dispositive terms if the changes will further the purposes of the trust because of the existence of circumstances unknown to the settlor.  The trial court granted summary judgment to the trustee, the daughter appealed, and the Indiana intermediate appellate court affirmed.  The court found that the trust terms showed that the primary purpose of the trust was to provide for the daughter to whom the trustee had sole discretion to distribute income and principal for maintenance, health, education and welfare.  In addition, the daughter had a special testamentary power of appointment over any trust property remaining at her death and only unappointed property would pass to the mother’s other descendants. 

See Kristoff v. Centier Bank, No. 45A03–1204–TR–186, 2013 WL 587477 (Ind. Ct. App. Feb. 15, 2013).

Special thanks to William LaPiana (Professor of Law, New York Law School) for bringing this case to my attention.

Married Couple's Estate Planning Guide

For married couples, the passage of the fiscal cliff bill, also known as the American Taxpayer Relief Tax Act of 2012 (ATRA), brought good news. For one, both the portability provision and the marital deduction were made permanent by ATRA. Unfortunately for some, the provision only helps taxpayers that passed away after December 31, 2010 and does not apply to same-sex married couples or if the surviving spouse is not an United States citizen. What is important to remember about portability is that the process is not automatic. The executor that is managing the estate must transfer the unused portion of the decedent's lifetime gift and estate tax exemption to the surviving spouse. The executor must file "an estate tax return when the first spouse dies." A taxpayer must take into account several different aspects of the portability provision. First, the portable amount is not adjusted for inflation. Second, it does not apply to the exemption for GST taxes. Finally, the usefulness of the portability exemption does not replace the usefulness of a bypass trust.

An additional important aspect of portability occurs when the surviving spouse remarries. If a surviving spouse takes the exemption of their first spouse and remarries, they are not allowed to hold on to their first spouse's exemption if their second spouse passes away before them. The surviving spouse is only allowed to take the unused exemption of their second spouse.

See Deborah L. Jacobs, A Married Couple's Guide To Estate Planning, Forbes, Jan. 9, 2013.

More Fiscal Cliff Changes Could Come

As I have previously discussed, Congress and President passed a resolution, H.B. 8, that averted the fiscal crisis, that made the current estate tax rate permanent (indexed for inflation), and raised the estate tax rate to 40% on income that exceeds the exemption. I also discussed, how the gift tax and the estate tax exemption are still one unified credit and how the portability provision has remained intact. On the issue of the GST (Generation-Skipping Transfers) Tax, the exemption is the same as before and the rate has increased to reflect the estate tax exemption. Finally, the annual gift tax exemption has remained the same, only seeing an increase based upon inflation, at $14,000. The fiscal cliff bill also ensured that a taxpayer could still take a federal deduction if the taxpayer has to pay a state estate tax. The bill retained the old law, which states that "the federal government shared up to 16% of the tax that it levied with states." 

While this is the basic framework, there could still be changes on the horizon that target not only the exemption but particular estate planning techniques. President Obama has stated that he would like to place some restrictions on estate planning techniques, "such as [GRAT]s, valuation discounts, [FLP]s, grantor trusts, and dynasty trusts." Even with the old, now permanent, estate tax exemption, many estate planning attorneys are compelled to remind everyone that this does mean that people should not talk to an estate planning attorney. There are a variety of aspects that involve a person's estate plan, including but not limited to the estate tax exemption. For estate planning attorneys and prospective clients, it is important to remember that permanent does mean that it can never change, it only means that there is no sunset provisions that provides a definite expiration date to the law. What people should take from this is that there is no better time than the present to speak to an attorney about estate planning issues. We can never know when Congress might change its mind.

As for the other tax issues raised by the fiscal cliff, the bill will decrease tax rates for taxpayers with a income of $400,000 or $450,000 for couples, but increase the tax rate those making above the threshold to 39.6%. The bill also limits the amount of itemized deductions a taxpayer with an income greater than $250,000, "$300,000 for joint filers, and $275,000 for heads of household" can take. The bill also provides an alternative minimum tax exemption for individuals at $50,600, and $78,750 for joint filers. The capital gains tax rate has increased to 20%, but only for those making above the $400,000 or $450,000 limits that I discussed earlier. Additionally, there is a new rule that allows taxpayers to convert any traditional 401(k) to a Roth 401(k), and allows seniors to take advantage of a charitable deduction that I discussed here.

See Hani Sarji, More Estate Tax Changes Could Follow Fiscal Cliff Deal, Forbes, Jan. 6, 2013.

Fiscal Cliff Bill Passes Both the House and the Senate

As of January 1, 2013, the House of Representatives passed the bill that passed the Senate on New Year's Eve. The deal reached was a compromise from both Democrats and Republicans. President Obama is expected to sign the bill into law today on January 3, 2013.

The bill "makes permanent the Bush administration's tax cuts for individuals earning less than $400,000 per year and couples earning less than $450,000." For income that exceeds the new threshold, the tax rate will be 39.6%, which reflect the tax rates from the Clinton administration. Estimates conclude that the new tax rate will generate about $600 billion in new revenue. On the matter of the estate tax, the bill passed by the house and the senate will maintain the $5 million lifetime gift and estate tax exemption (indexed for inflation), but the rate on income that exceeds to the exemption has increased. The new estate tax rate is now 40% instead of 35%. In addition, the new bill will prevent Sword of Damocles that has swayed over this country's neck for the past year. The bill will delay the vast and automatic spending cuts that were set to activate if Congress did not come to an agreement on the fiscal cliff.

I have provided a link to the full text of the bill if you interested here. Readers can also find a complete summary of all of the fiscal cliff changes in the article from Mr. Ezra Klein.

See Matt Smith, House Staves Off Fiscal Cliff, But More Squabbles Lie Ahead, CNN Politics, Jan. 2, 2013; see also Ezra Klein, Wonkbook: Everything You Need To Know About The Fiscal Cliff Deal, The Washington Post, Jan. 1, 2013.

Special thanks to  Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) and Joel Dobris (Professor of Law, UC Davis School of Law) for bringing these articles to my attention.

CLE on Planning, Drafting and Administration

Minnesota CLE is hosting a Live Seminar entitled, 2013: An Estate Planning Odyssey: Critical Issues In Planning, Drafting and Administration on Friday, January 4, 2013 from 9:00 am - 4:30 pm in Minneapolis, Minnesota. The keynote address will be given by Ronald D. Aucutt. Attorneys who cannot make it to the live seminar can also view the Mr. Aucutt's keynote address through webcast. Provided below is a description of the event:

• Ron Aucutt’s coverage of what happens in the 2012 election; tax reform in general; estate, gift and GST taxes and any last-minute developments
• The latest on changes to the Minnesota estate tax – the calculator; the intersect with federal estate and gift tax law changes and the status of “qualified” property
• Small Estates Panel – drafting ideas for equalizing gifts; planning to minimize claims under recovery statutes; using trusts to protect M.A. interests; inter vivos gifts to reduce Minnesota estate tax and disclaimers for federal estate taxes
• Large Estates Panel – predicable ramifications of inaction or action by Congress; the perils of independent trustees and trust protectors; drafting tips including guiding language for trustees, avoiding the Delaware tax trap, decanting provisions and disclaimers
• Income tax issues for trusts and estates – pitfalls and opportunities of higher rates on ordinary income; capital gains rate increases; the new tax on investment income for individuals and trusts and thoughts on investment allocation to minimize the impact of the new tax
• And much, much more!

Man Tries To Dodge Estate Tax By Establishing a Foundation

The Education Assistance Foundation for The Descendants of Hungarian Immigrants in The Performing Arts (EAFDHIPA) was established as education foundation designed to provide scholarships to junior or senior college students of hungarian of eastern european descent that have a descendant who took part in the performing arts. The foundation was established in 2005, has received more than $2 Million in donations, and have only given $200,000 in only a few scholarships. To make matters more interesting, when the IRS conducted an audit of the foundation, they discovered that one of few scholarships awarded were given to someone with the same last name and address as the President of the organization. If this seems like something gone awry then you are not alone because the IRS felt the same way too.

After conducting the audit of their 2005 tax return, the IRS concluded "that the Foundation was created in order to avoid paying estate and generation-skipping taxes on the estate of one individual, Julius Schaller, and to finance the education of Mr. Schaller's relatives." The estate has challenged the conclusion in tax court pending the appeal of a district court's decision this month. That case dealt with the tax exemption status of the organization. The IRS is claiming that Mr. Schaller's estate has committed fraud and tried to place a tax penalty on the organization.

See Peter J. Reilly, Education Foundation Or Estate Tax Dodge - Remains To Be Seen, Forbes, Nov. 28, 2012.

Special thanks to Bruce J. Gary (Price, Crooke, Gary and Hammers, Inc.) and Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.

Last Chance to Sign-Up for a CLE on Using Gift and GST Tax Exemption

The ALI-CLE is sponsoring a telephone seminar/audio website with The American College of Trust and Estate Counsel (ACTEC) entitled, Using Gift and GST Tax Exemptions Before Year-End, on Monday, November 19, 2012 from 12:00 - 1:00 p.m. EST. Provided below is description of the event:

Why You Should Attend?

This informative telephone seminar / audio webcast will give you an overview of the current gift and GST tax exemptionsand potential planning opportunities for clients who wish to make tax-free gifts before year-end.

What You Will Learn?

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (aka TRA 2010) created significant but temporary reductions in estate and gift taxes. The exclusion amount of $5,000,000 plus lower tax rates have created opportunities for individuals to transfer wealth and save thousands, or even millions of dollars in taxes—but only through December 31, 2012—absent further legislation.

Experienced practitioners Marya P. Robben, Partner, Lindquist & Vennum PLLP, Minneapolis, and Adam K. Sherman, Partner, McDermott Will & Emery LLP, Chicago, look at the status of gift and GST tax exemptions—and give a practical review of ways your client might use the increased exemptions and lower tax rates to transfer wealth while minimizing tax liabilities.

This program is a replay of a previously presented program. Questions may be submitted during the program and will be answered by email within 48 hours of the program ending. This program was originally presented on August 16, 2012.

Who Should Attend?

Trust and Estate Counsel, Wealth Managers and other legal professionals who could benefit from an overview of Gift and GST tax exemptions should attend this accredited continuing legal education program from ALI CLE.

CLE on the Gift and GST Tax Exemption

The ALI-CLE is sponsoring a telephone seminar/audio website with The American College of Trust and Estate Counsel (ACTEC) entitled, Using Gift and GST Tax Exemptions Before Year-End, on Monday, November 19, 2012 from 12:00 - 1:00 p.m. EST. Provided below is description of the event:

Why You Should Attend?

This informative telephone seminar / audio webcast will give you an overview of the current gift and GST tax exemptionsand potential planning opportunities for clients who wish to make tax-free gifts before year-end.

What You Will Learn?

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (aka TRA 2010) created significant but temporary reductions in estate and gift taxes. The exclusion amount of $5,000,000 plus lower tax rates have created opportunities for individuals to transfer wealth and save thousands, or even millions of dollars in taxes—but only through December 31, 2012—absent further legislation.

Experienced practitioners Marya P. Robben, Partner, Lindquist & Vennum PLLP, Minneapolis, and Adam K. Sherman, Partner, McDermott Will & Emery LLP, Chicago, look at the status of gift and GST tax exemptions—and give a practical review of ways your client might use the increased exemptions and lower tax rates to transfer wealth while minimizing tax liabilities.

This program is a replay of a previously presented program. Questions may be submitted during the program and will be answered by email within 48 hours of the program ending. This program was originally presented on August 16, 2012.

Who Should Attend?

Trust and Estate Counsel, Wealth Managers and other legal professionals who could benefit from an overview of Gift and GST tax exemptions should attend this accredited continuing legal education program from ALI CLE.

Article on the Generation-Skipping Transfer Tax

Robert Moshman (Professional Writer and Attorney) recently published his article entitled Avoiding a GSTT Asteroid*: Revisiting a dangerous Adversary: The Generation-Skipping Transfer Tax, 4 Est. Plan. & Community Prop. L.J. 281 (2012).  The introduction to the article is below: 

It hit with the force of 10,000 nuclear weapons. A trillion tons of dirt and rock hurtled into the atmosphere, creating a suffocating blanket of dust the sun was powerless to penetrate for a thousand years. It happened before. It will happen again. It’s just a question of when.

The odds that an estate will run afoul of the generation-skipping transfer tax (GSTT) may be slim nowadays, but estate planners must never let down their guard against this virulent adversary. The GSTT sneaks up without warning and packs a powerful punch. Just the convoluted process of calculating this tax can send an estate planning professional into a black hole of despair. 

This article will review GSTT rules and strategies. First, however, to set the GSTT in proper context, we must travel back through the time-space continuum to a more innocent time, before the GSTT existed, when the estate tax was the primary opponent for estate planning. 

* “Avoiding a GSTT Asteroid” was originally published in the August 1998 issue of The Estate Analyst. About one-third of that issue consisted of footnotes due to the author’s youthful infatuation with trivia. This article was then rewritten and published in the March/April 1999 issue of the ABA’s Property & Probate journal. This new version is produced with updates for inclusion in a textbook by Professor Gerry Beyer. 

Fourth Edition of "Wills, Trusts, and Estates for Legal Assistants" Published

The Fourth Edition of Gerry W. Beyer (Governor Preston E. Smith Regents Professor of Law, Texas Tech University) and John K. Hanft (San Francisco State University College of Extended Learning, Paralegal Studies Program), Wills, Trusts, and Estates for Legal Assistants has just been released.

This book is designed for legal assistants and paralegals to use during their legal training as well as a reference for individuals who assist attorneys in their estate planning practice.  The book focuses on intestate succession, wills, trusts, estate administration, non-probate assets, wealth transfer taxation, disability and death planning, and malpractice and professional responsibility.

Illinois Reforms Tax Return

The Attorney General in Illinois recently amended the “Illinois Estate and Generation-Skipping Transfer Tax Return” to align with the Illinois Religious Freedom Protection and Civil Union Act.  The Act gives civil unions the same legal status as married spouses.  Civil union partners who elect a marital deduction or qualified terminal interest property election are now required for file a Form 700, a pro forma Federal Form 706, and for a federally filed taxable estate, a copy of the Federal Form 706.

See Estate Taxes, Flinn Report: Illinois Regulation, Aug. 24, 2012.

Special thanks to Brian J. Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.

Article on the GST Exemption

Lawrence W. Waggoner recently published his article entitled, Effectively Curbing the GST Exemption for Perpetual Trusts, Tax Notes, Vol. 135, No. 10 (June 2012).  An abstract from the article, available on SSRN, is available below. 

Current law allows a married couple to transfer up to $10.24 million into a trust that is exempt from the federal generation-skipping transfer tax. Congress did not impose a federal durational limit on trusts that qualify for the GST exemption, relying instead on state perpetuity laws that limited the life of the trust. The absence of a durational limit on the GST exemption provided an incentive for banks and the estate-planning bar to lobby their state legislatures to pass legislation allowing trusts to last forever or for several centuries. The lobbying efforts proved successful in many states. The result is that the wealthy are creating trusts in significant numbers that will be GST-exempt for much longer than Congress originally intended. As part of the Obama Administration’s Fiscal Year 2013 revenue proposals, the Treasury Department stated its position that the absence of a durational limit on the GST exemption is inconsistent with the purpose of the exemption and undermines the policy of the GST tax, but its proposed solution would leave many trusts and much wealth GST-exempt for much longer than Congress originally intended. For perpetual trusts created before enactment, the Treasury Proposal would allow them to continue to be unburdened by a durational limit. For perpetual trusts created after the effective date of enactment, the Treasury Proposal would still allow them to qualify for the GST exemption, but would have the exemption expire ninety years after the trust was created.

In this essay, the author advances a solution that would be far more effective than the Treasury Proposal. For new trusts, my proposal would deny the GST exemption ab initio, unless the trust must terminate within one of three perpetuity periods: (1) 21 years after the death of a life in being; (2) 90 years after creation; or (3) the death of the last living beneficiary who is no more than two generations younger than the settlor. For existing trusts, my proposal would allow a grace period during which the trusts can be modified to terminate within the allowed period, but absent modification, the trusts would lose their GST exemption at the end of the grace period. The solution the author advances is consistent with the original intent of the GST exemption, for it would truly end the perpetual-trust movement and its associated perpetual GST exemption for both new and existing trusts.

The Tax Exemption Problems

As I have previously discussed, Congress set the estate, gift, and GST Tax Exemption at a historically high level for 2012. In the case of the gift tax, Congress set the lifetime gift tax exemption at $5.12 million through the end of 2012. Now, a distinct group of people are faced with a challenge. Should they take advantage of a once in a lifetime gift tax exemption? Or should they not take the exemption because they are worried about not having enough income to support themselves for the rest of their lives? 

This group of people is not compromised of those who have a 9-figure estate or the wealthiest Americans in our country. For those people, using the gift tax exemption is not a question at all. This has only become an issue for those are legitimately concerned with not any enough income to sustain themselves if they make this gift and their financial situation changes for the worse. Unfortunately, time is also an issue here. Most financial advisors claim that it takes at least 3 months to make a gift of the size of the exemption, and if these people want to take advantage of the tax exemption they must make a decision soon.

See Paul Sullivan, To GIve or Not to Give, Up to $ 5.12 Million, New York Times, June 22, 2012.

Special thanks to Jim Hillhouse(Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

AICPA Petitions Congress

The AICPA or the American Institute of CPAs petitioned Congress to make permanent changes to the estate tax. The organization asserted that Congress's actions would alleviate the uncertainty that all members of the profession feel when they try to provide advice to their clients without the knowledge of whether the tax exemptions will expire at the end of the year. In addition, the AICPA also encouraged Congress to act now to prevent any adverse consequences that could occur from the expiration of legislation that governs the transfer of gifts to multi-generational trusts. The GST exemption applied in these circumstances.

Primary the AICPA has urged Congress to make many of the reforms that it listed within its study entitled, Study on Reform of the Estate and Gift Tax System.

See AICPA Urges Congress to Make Permanent Estate Tax Changes As Soon As Possible, AICPA, June 14, 2012.

2012 Estate/Gift/GST Tax Exemptions

As I have previously discussed, the estate/gift/GST tax exemption has been set at an unprecedented level, and that will possibly come to end at the end of 2012. This article provides a detailed list of the three exceptions and a summary of how The Tax Relief Unemployment Insurance Re-authorization and Job Creation Act of 2010 will affect the three exceptions. I will provide just a short summary of each one.

• The estate tax exemption will be set at $5,120,000 for 2012, and the top tax rate will be 35%. By 2013, the exemption will fall to $1,000,000 and the top tax rate will be 55%.
• The lifetime gift tax exemption will increase to same amount as the estate tax exemption amount and rate, and will return $1,000,000 and a 55% tax rate in 2013.
• The GST Tax or the Generation Skipping Transfer tax will also be set at $5,120,000 with the top tax rate being 35%. Like the estate and the gift tax exemptions, this will fall to $1,000,000, and the top tax rate will increase to 55%.

See Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara & Einiger, LLP, April 2012 - Transfer Tax Alert, JDSupra, Apr. 30, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

Billionaire Heiress Paid More In Taxes Than She Paid To John Edwards

Among the charges that were brought against John Edwards, this matter involves the donation he received from billionaire Rachel Mellon. In 2008, Mellon sent an estimated $725,000 to Rielle Hunter, Edwards's mistress and the mother of his daughter. While most of the nation was concerned about whether the donation constituted a misappropriation of election funds for non-campaign purposes, a separate question arose among trust and estate lawyers: what were the tax consequences of Ms. Mellon's gift?

Some estate planning lawyers argue that Ms. Mellon would probably be subjected to both the gift tax and the generation-skipping transfer tax. Based upon the applicable tax rate at the time the gift was made, it is estimated that Ms. Mellon probably had to pay the IRS a little more than John Edwards in taxes or a total of $786,083.

See Wendy S. Goffe, Uncle Same Got More Than John Edwards From Billionaire Heiress, Tax Pros Say, Forbes, June 4, 2012.

Advantages of Generation-skipping Trusts

Generation-skipping trusts are also known as dynasty trusts. These long-term trusts are designed to avoid estate taxes when one generation transfers wealth to the next generation.

Over four generations, estate tax savings could add up to 70%. A grantor can set up a dynasty trust during lifetime using the grantor’s annual gift tax exclusion and/or $5 million gift tax exemption. Dynasty trusts can also be created at death with the grantor’s estate tax exemption. When the beneficiaries die, the assets in the trust pass to the next generation free of estate and gift tax. Individuals can leverage their GST tax exemption with life insurance too.

Typically, a separate dynasty trust is created for each of the grantor’s children. During the lifetime of the child, the income and principal can be used for health, education, maintenance and support of the child. When the child dies, the assets will pas to his/her children in equal trust shares and the scenario will repeat itself for as long as the applicable state laws will allow.

You can build flexibility into the trust with a limited power of appointment provision, which could allow a preferred beneficiary to rewrite the terms of the trust to a certain extent.

Beyond tax advantages, dynasty trusts can ensure that beneficiaries are protected from their inabilities, or disabilities, that the trust assets will never be outside the reach of the grantor’s lineal descendants, and that property is professionally managed.

See Julius Giamarco, Generation-skipping Trusts, Producer’s Web, Apr. 11, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

The Status of Our Federal Tax Laws

How our federal laws will evolve and change in the course of a year is difficult to determine, especially with all of the different circumstances that could affect legislation. For example, within the coming year we could have a new President and Congress and with it a change in policy. 

Here's what is known about our current federal tax laws in 2012:

• The progressive tax brackets are set at the following percentages for the ordinary income tax: 10%, 15%, 25%, 28%, 33%, and 35%.
• If a taxpayer has a rate of 25% or higher, then your capital gains and dividend rate will be set at 15%, otherwise your rate is 0%.
• Gains on collectibles held long term will be taxed at 28%, whereas short term gains are taxed based upon your ordinary income tax bracket. 
• Congress has not increased the amount allowed for deductions on Charitable IRAs.
• There is no limitation on the amount of itemized deductions a taxpayer may take.
• In 2012, the personal exemption phase-out will not apply. 

Here's what is known about about how our federal tax laws will be structured in 2013 unless Congress chooses to act and changes these provisions:

• The progressive tax brackets are set at the following percentages for the ordinary income tax: 15 %, 25%, 28%, 31%, 36%, and 39.6%.
• All Capital Gains will be taxed at 20%.
• There will be no change in the tax for collectibles except that the highest tax bracket has increased.
• There will be no change for charitable gifts.
• Deductions, both charitable and itemized, will be subject to the following limitation: the amount will be reduced by 3% of the amount of AGI that exceeds what is allowed in the statute. This amount should not exceed 80% of the amount that allowed to be taken as a deduction.
• The personal exemption phase-out will apply, subject to inflation, and will vary depending on your filing status.

For Estate and Gift tax purposes here are the following laws for 2012 and 2013. 

• The exemption is set a $5.12 million per each taxpayer with the rate set at 35% for all transfers, and can be used in life and death. 
• For spouses, one spouse may transfer the remainder of their exemption to their spouse; however, this only applies for 2011 and 2012. 
• In 2013, the exemption will be set $1 million, and the rate will be 55%.

However, these are subject to change based upon the political decisions that this country will make by the end of this year. Mr. Teitell gives a detailed explanation of each candidate's entire tax proposal; however, this excerpt will only cover some of the main provisions.

• President Obama wants to keep the ordinary and capital gains rate for the 2013 year, tax dividends as ordinary income setting the rate at the taxpayer's ordinary tax rate, and apply a 25% rate in recapturing depreciation. Furthermore, President Obama would like to make the 2009 estate, gift, and generation-skipping transfers rate permanent. The exclusion amount for estate tax would be set at $3.5 million while the gift tax would be set at $1 million. Additionally, the tax rate would be set at 45%. President Obama may be also looking to implement the Buffet Rule, which essentially creates an alternative minimum tax at a rate of 30% for the wealthiest Americans.
• Newt Gingrich policy is based upon job creation and so he wants to lower the 2013 tax rates; however, he does want to make the increases permanent. Otherwise, Gingrich wants to eliminate the estate tax and and implement a flat tax.
• Ron Paul wants to lower taxes and repeal most capital gains tax laws. He wants to abolish the 16th Amendment, and would like to dismantle the IRS.
• Mitt Romney would like to make the Bush tax cuts permanent, lower income tax rates, and repeal the estate tax.
• Rick Santorum would like  to make the tax code easier and more similar by reducing the number of tax brackets to only two: 10% and 28%. Furthermore, Santorum would like to lower the capital gains tax, and increase the amount of deductions that the tax code provides.

See Conrad Teitell, Washington Legislative Climate for Chartiable and Estate Planning, Trusts & Estates, Mar. 26, 2012. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

The Tax-Free Transfer Ends With 2012

High net-worth investors have only the remainder of 2012 to transfer $10 million to their potential heirs tax-free. Andrew Friedman, of The Washington Update, wrote a 10 page paper about this unique opportunity. Friedman's reported that Congress chose to increase both the estate tax and the git tax exemption to $5 million (now $5.12 million to account for inflation) allowing for $10 million (or $10.24 million) tax free transfer. The current law also allows for generation skipping-transfers. This provides a significant advantage over the rules that will take affect at the end of the year. These rules will only allow a $1 million exemption.

Friedman's paper also explains the potential benefits and problems in choosing different estate planning options. He argues that while some investors might want to transfer assets to an irrevocable trust, however, this could create some estate tax issues. He asserts that the most beneficial option would be to take your assets and invest in a life insurance policy. This would allow an investor to obtain the earnings of life insurance policy, tax free.

An investor could also take advantage of tax free benefits by acquiring an irrevocable life insurance trust (ILIT) or by choosing to invest the assets of a trust into an annuity. Both assets allow the earnings from their investments to remain tax free. In the case of the annuity, the assets must remain in the annuity to take advantage of the tax free benefits. Both options will provide a constant stream of income, which would be advantageous to the beneficiary even if that person does not need a constant source of income. Remember, to take advantage of these principles, an investor must make the transfer by the end of 2012. 

See Gil Weinreich, Estate Planners: 9 Months Left for Tax-Free Transfer of $10 Million, AdvisorOne, Mar. 30, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

An Overview of Current Taxation and Possibilities for the Future

What is known about 2012:

• Ordinary income tax rates are at 10%, 15%, 25%, 28%, 33%, and 35%.
• Capital gains apply to taxpayers in the 25% bracket and above – the dividend rate is 15%.
• Gains on artworks held for more than a year are taxable at 28%.
• There are no tax incentives for charitable IRAs.
• There is no itemized deduction limitation or personal exemption phase-outs.
• The gift and estate tax exemption is $5,120,000 per person and the tax rate is 35%. The exemption can be used during life and/or at death. Portability of unused exemption is possible.

What is known about 2013:

• Ordinary income tax rates are at 15%, 25%, 28%, 31%, 36%, and 39.6%.
• Capital gains and qualified dividends are taxed at 20%.
• Gains on artworks held for more than a year are still taxable at 28%.
• No tax incentives for charitable IRAs
• There are limitations on itemized deductions for upper-income taxpayers. Charitable and other itemized deductions will be reduced by 3% of the amount by which AGI is greater than statutory limits, but not by more than 80% of the otherwise allowable deductions
• There is a personal exemption phase-out for upper income taxpayers.
• If Congress takes no action before 2013, then the gift and estate tax exemption will be $1 million and the rate will be 55%. The generation skipping transfer tax will also be $1 million. Portability will not apply.

President Obama’s Tax Proposals:

• Reinstate 36% and 39.6% tax rates for upper income taxpayers.
• Qualified dividends would be taxed as ordinary income for upper income taxpayers and allow the current 15% reduced tax rates to expire at the end of 2012.
• Tax net long-term capital gains at 20% for upper income taxpayers.
• Tax a partner’s share of income on an investment services partnership interest as ordinary income
• Reduce the value of some tax expenditures.
• Limit tax value of specified deductions from AGI.
• Reinstate limitation on itemized deductions and the personal exemption phase-out for upper income taxpayers.
• Make the estate, gift, and GST tax laws that were in effect in 2009 the permanent rules. The exclusion amount for estate and GST taxes would be $3.5 million and the gift tax exclusion would be $1 million. The tax rate would be 45%. Also make portability permanent.

Republican Candidate Tax Proposals:

• Newt Gingrich: Stop 2013 tax increases to create economic stability and move towards an optional 15% flat tax.
• Ron Paul: Lower taxes, abolish income and estate taxes, immediately repeal capital against taxes, let Americans claim more tax credits and deductions, restrain federal spending.
• Mitt Romney: Reduce income tax rates for Americans by 20%, eliminate the estate tax, aim for a conservative overhaul of the tax system to create lower, flatter rates on a broader base.
• Rick Santorum: Only have two tax rates – 10% and 28%, eliminate the estate tax, lower capital gains and divident tax rates to 12%, retain deductions for charitable giving, home mortgage interest, healthcare, retirement savings, and children.

See Conrad Teitell, Washington Legislative Climate for Charitable and Estate Planning, Trusts and Estates Newsletter, Mar. 26, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.