HIGHLIGHTS OF THE NEW ESTATE TAX LEGISLATION

YOn December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. We'll cover here just some of the highlights as it relates to the estate tax.

The most newsworthy change is the increase in the federal estate tax exemption. Your estate will have to pay federal estate taxes if its net value when you die is more than the exempt amount in effect at that time. For 2010, 2011 and 2012, the individual exemption is now $5 million and the tax rate is 35%. So if someone dies in 2010, 2011 or 2012 and their taxable estate is less than $5 million, no estate taxes will be due. If their estate is greater than $5 million, the excess will be taxed at 35%.

There are two important points to remember: These changes are only effective for the next two years. If Congress does not act again before the end of 2012, on January 1, 2013, the estate tax exemption will drop to $1 million (adjusted for inflation) with a top tax rate of 55%. Also, Ohio does have its own estate tax at this time, so your estate could be exempt from federal estate tax but still have to pay Ohio estate tax.

The current estate tax law, both federal and Ohio, provides an unlimited deduction for assets left to a surviving U.S. citizen spouse. So the first spouse who dies can leave everything to the surviving U.S. citizen spouse and there will be no estate taxes due. However, this may result in a problem upon the second death because at that time the estate tax exemption that could have been used at the first death is not available to shield assets in the surviving spouse's estate.

For those couples in which both spouses die between January 1, 2011 and December 31, 2012, the Congress added a "portability" provision to the new law. This means that if one spouse dies in 2011 or 2012, the Executor of that spouse's estate may transfer any unused federal estate tax exemption to the surviving spouse by making the election on a timely filed federal estate tax return. But the transferred exemption must be used before December 31, 2012 or it is lost. Also, only the most recent deceased spouse's unused exemption may be used by the surviving spouse, which could impact a survivor's decision to remarry.

Even with the portability provision available, relying on the unlimited marital deduction can cause other problems. For example, by leaving everything to your spouse, you have no control over how your share of the estate is managed or distributed. That surviving spouse can do whatever he or she wants with the assets, including disinheriting any children you may have from a previous marriage. Also, any growth in the assets will be included in the surviving spouse's estate when he or she dies and will be taxed at the rate in effect at that time.

By planning with the typical Marital and Family trusts (also known as A-B trusts), you can make sure you use both exemptions, and you can control how your half of the estate is managed and ultimately distributed. The assets from your estate can still be available to your spouse for his or her use, depending on your wishes.

Another important provision in the new tax law is that for 2011 and 2012 the gift tax exemption is $5 million per person ($10 million for a married couple), with the tax rate above the exemption at 35%. This exemption is unified with the estate tax exemption, so that any unused amount can be transferred to your surviving spouse under the portability provision.

You can still make the annual tax-free gifts of $13,000 to as many individuals as you wish. To the extent you give more than that to someone, the excess is considered a taxable gift and goes against your lifetime gift/estate tax exemption.

Finally, the generation skipping transfer tax exemption is $5 million for 2011 and 2012 as well. A generation skipping transfer occurs when some or all of your estate goes directly to a grandchild or a non-relative who is more than 37.5 years younger than you. If that transfer becomes subject to the GST tax, that tax is equal to the highest federal estate tax rate in effect at the time of the transfer and is in addition to the federal estate tax. The purpose of this tax is to tax assets that are transferred at each generation. So if you skip a generation, you don't skip the taxes that would have been paid.

The 2010 Tax Act provides tremendous opportunities to transfer vast amounts of wealth for families with estates of all sizes, but the opportunity expires on December 31, 2012. At the same time, individuals with estates of $5 million or less can focus on planning that concentrates on family goals and objectives without having to worry about federal estate taxes, at least for the next two years. (Remember you still must consider Ohio estate taxes.)

It's a good time to take a look at your estate plan and see if you can take advantage of these planning opportunities. In any event, it never hurts to review to make sure your personal concerns are still addressed in your estate plan.

Submitted by:
Marie Mirro Edmonds

Who Should Be Your Trustee And What Do They Really Need To Do?

You have decided to establish trusts to accomplish your estate planning and now you need to decide who should serve as trustee. That is often the most difficult, and the single most important decision that needs to be made. You certainly have many choices. Beneficiary or non-beneficiary trustees? Family members, friends, or a corporate trustee? One trustee to serve alone or multiple trustees? There is not one right answer, as each choice has its own advantages and disadvantages.

What is a trustee? A trustee is some person or institution who holds property for the benefit of someone else. Before you choose who you wish to act as your trustee, it makes sense to know what a trustee has the responsibility to do and what duties he or she has.

A trustee has a duty of skill and care. This means the trustee will need to spend probably some significant amount of time to take care of the trust business. How much time that is depends on the purposes and terms of the trust. A trustee may be required to hire and consult with skilled professionals to help them carry out the trustee’s duties, which can include getting legal advice, tax planning and advice, investment advice, accounting assistance, etc.

A trustee also has a duty of loyalty, which means that the trustee’s personal interests cannot conflict with the beneficiaries’ interests. This may be a problem when a trustee is also a beneficiary. However, this problem can be alleviated somewhat by language in the trust itself.

A trustee has a duty to communicate with the beneficiaries. The Ohio Trust Code mandates certain communication - letting current and future beneficiaries know of the existence and terms of the trust, the identity and contact information for the trustee, what assets are in the trust, and the right to have a copy of the trust. The best practice is always to keep the beneficiaries informed.

There is also a duty of confidentiality. That means a trustee must keep certain information confidential. That may be confidentiality between the trustee and all of the beneficiaries, or between the trustee and one of the beneficiaries. There is certainly a balance that must be met between the duty to communicate and the duty of confidentiality. In selecting your trustee, consider who is best to put in a position to deal with these interests.

A trustee has a duty of impartiality, meaning the trustee must balance the interest of all interested beneficiaries, current and future.

Finally, the trustee has a duty not to delegate. In other words some duties should not be delegated, for example, acts involving the exercise of judgment and discretion. This duty does not prevent the trustee from obtaining the advice necessary to make such decisions. It just means that the decisions are ultimately the trustee’s.

The trustee also has duties regarding investment of the trust assets, tax reporting, etc., which should also be taken into account when choosing your trustee. It may not always be less expensive to have individuals serve as trustees rather than a corporate trustee. Choosing the correct trustee requires some serious thought and consideration, and you should discuss the advantages and disadvantages of your options with your attorney when making your choice.

Submitted by:
Marie Mirro Edmonds

Some Thoughts On Medicaid Planning

Medicaid is a federal government program that provides financial assistance to persons age 65 and over, or those under 65 who are disabled and who are in need of substantial medical assistance. Medicaid is a needs-based program; a person must have a medical need for assistance and must be of limited financial means before he or she can qualify.

Medicaid is very different from Medicare. Medicare is health insurance available to all persons over the age of 65 who qualify for Social Security, as well as those under age 65 and who Social Security determines to be disabled. Medicare will not pay for nursing home care, assisted living or home health care on a long term basis. Medicare will only pay for this type of care for up to 100 days, and only for the purpose of providing rehabilitation following a minimum of a three day hospital stay.

With the national average cost for a private room in a nursing home over $75,000 per year, a recent Harvard University Study found that 69% of single people and 34% of married couples would exhaust their assets after 13 weeks in a nursing home. Thus, Medicaid planning has become an important consideration for many people.

“Medicaid Planning” involves either spending down or otherwise protecting a person’s assets so that he or she has minimal assets and can meet the financial criteria to qualify for Medicaid ($1500 for the Medicaid recipient). Medicaid planning can occur in either a pre-planning or crisis planning situation. Pre-planning is for individuals who have not begun to spend their assets for their care, but may need to in the future. Crisis planning is for those persons using their assets now for long-term care with a substantial risk that they will run out of money.

Sometimes life insurance can offer a benefit in a pre-planning situation. If an irrevocable trust purchases a single premium life insurance policy, it can replace a couple’s net worth and protect the cash value from Medicaid. However, in order for the policy to be completely protected, the five year lookback period would have to have run. In addition, if a five year long term care policy can be purchased, or a life insurance policy with a long-term care rider, all of a couple’s other assets not used to purchase the life insurance can potentially be protected, even for the five year lookback period.

Even when doing crisis planning, there are several opportunities to protect assets. While transfers to a child or an irrevocable trust create a penalty period, sometimes a planning strategy involving gifting and the use of an annuity can be a valuable planning tool. One strategy which has been recently confirmed as valid by a Court of Appeals is the purchase of a Medicaid Qualifying Annuity by the spouse not in the nursing home (the Community Spouse) with the excess assets over the amount the Community Spouse is allowed to keep. This converts those assets from a resource to an income stream, and the Community Spouse’s income does not need to be used to pay for the other spouse’s care.

Annuities or promissory notes are also used in a gifting strategy where at least half of a person’s assets can be protected from having to be spent on nursing home care. Because of the severe penalties for gifting in a Medicaid context, these strategies should not be undertaken without the advice of a Medicaid planning attorney.

Submitted by:
Marie Mirro Edmonds