Is Your Estate Plan in Order? - Transfer Pricing

For many of our clients, this is a particularly appropriate time to review one's estate plan. In most circumstances, the passage of several years alone is a sufficient basis for commencing such a review based upon changes in family and financial circumstances. However, there have been several significant and recent changes to both the federal and state estate tax laws, as well as to certain state laws pertaining to estate planning generally.

Even for those individuals who believe they have no personal reasons to review their estate plans at this time, these recent legislative changes serve as a separate and independent basis for doing so. While it is anticipated that there will be future changes to at least the federal estate tax, there are a number of techniques that can be implemented now which can: (1) permit an individual to achieve his or her current objectives; (2) correct any deficiencies in the documents as a result of the changes in the law to date (some of which are discussed in more detail below); and (3) anticipate and plan for such possible future legislative changes.

Each person's estate plan requires a careful consideration of both tax factors and personal objectives. Estate planning decisions should continue to be made taking into account both substantive legal and tax issues as well as one's own personal choices.

In many circumstances, such personal choices previously made may not reflect one's current wishes. For instance, the appointment of executors, trustees and guardians may not be consistent with an individual's current thinking. Additionally, the ages at which property passes to beneficiaries perhaps should be modified as well. In many cases, the manner in which property is held (i.e., individually or in joint names with another) may result in property passing in a manner completely inconsistent with the provisions of one's will. This same issue arises even more frequently with respect to assets that pass by beneficiary designation such as life insurance and retirement plans. Lastly, one's current financial situation may differ dramatically from that which existed when the current estate plan was implemented.

The following summarizes some of the most important recent legal changes.

Changes in the Exemptions for Gift Taxes, Estate Taxes and Generation-Skipping Transfer Taxes

Presently, for federal tax purposes, the value of the lifetime gift exemption is $1 million, the value of the estate tax exemption is $1.5 million, and the value of the generation-skipping transfer tax exemption is $1.5 million. Also under present law, on January 1, 2006, the estate tax and generation-skipping transfer tax exemptions each will increase to $2 million, while the gift tax exemption will remain at $1 million. While further increases to the estate and generation-skipping transfer tax exemptions are scheduled for 2009, and an abolition of the estate and generation-skipping transfer taxes is slated for persons who die in 2010, it seems likely that Congress will make further substantial modifications to the gift, estate and generation-skipping transfer taxes either later this year or next. However, if Congress does not make further changes to the tax law, the federal estate tax and generation-skipping transfer tax exemptions will be reinstated in 2011 at the reduced amount of $1 million.

Among the important ramifications of the increase of these tax exemptions is the need for married couples to determine whether they have organized the ownership of their assets so that the exemptions of each spouse are fully utilized. Furthermore, in those circumstances where the estate plan of the first spouse to die divides assets between a marital share for the surviving spouse on the one hand and a share which is covered by the estate tax exemption on the other, the changing relative value of such shares to one another must be considered where the exemption share is not left solely for the benefit of the surviving spouse, lest the surviving spouse inadvertently be disadvantaged.

Changes to the Relationship Between the Federal Estate Tax and State Estate Taxes

In the past, the federal estate tax permitted a credit to be taken for certain state estate taxes. In essence, this was a form of revenue-sharing which permitted a state to collect a portion of the tax which otherwise would be paid to the federal government. To take advantage of this revenue-sharing opportunity, each state enacted its own estate tax which was at least equal to the federal credit.

Under federal legislation enacted in 2001, the federal credit has been reduced in recent years and, beginning in 2005, the federal credit was eliminated and replaced by a deduction. This has left most states facing an unanticipated decrease in revenue. To offset this, several states have considered amending their tax laws to continue to impose an estate tax based on some version of the prior federal law as if the federal credit still existed. This process has become known as the "decoupling" of the state estate tax from the federal estate tax. While some states have enacted such decoupling legislation (e.g., New York and New Jersey), for state constitutional reasons other states (e.g., Florida and Pennsylvania) have been unable to decouple, while other states (e.g., Delaware) have (for now) decided not to decouple.

The decoupling phenomenon has resulted in anomalies in many estate plans, particularly in those plans which divide an estate between a marital share and an estate tax exemption share upon the death of the first spouse. These anomalies depend on the specific governing state law, although the most widespread anomaly is that to obtain the largest exemption share for federal estate tax purposes it would be necessary to pay state estate tax upon the death of the first spouse. Depending on the size of the estate and the particular year of death, this additional state estate tax could be more than $200,000.

The impact of decoupling varies considerably from state to state. However, married persons who have created trusts in their wills need to review the impact of their own state's decoupling legislation. In general, new wills must now be drafted differently to account for this change and older wills should be modified to avoid inadvertent and unexpected tax consequences.

Beneficiary Serving as Trustee for Trusts Governed by New York Law

New York law previously placed limitations on a beneficiary serving as a trustee of a trust for his or her own benefit. While New York law generally applies to trusts created by New York domiciliaries, it also applies to other trusts, the terms of which specifically require the application of New York law, such as when a trustee is a resident of New York. Under the provisions of New York law prior to this amendment, a trustee was prohibited from making any trust distributions for his or her own benefit. Accordingly, a beneficiary could not serve as sole trustee of a trust for his or her own benefit.

The recent change to New York law now permits a beneficiary, as trustee, to make certain distributions of trust income and principal to himself or herself (i.e., for the beneficiary's health, education, maintenance and support). If the creator of the trust would like to provide for distributions beyond this standard, a co-trustee can be appointed. Thus, the beneficiary can now serve as his or her own sole trustee, without the absolute need of appointing a co-trustee. This is particularly appealing in the case of a surviving spouse who may no longer require a co-trustee to serve.

Living Wills

Perhaps more than any case in recent memory, that of Terri Schiavo brought into sharp focus the role of the law in guiding or influencing the decision-making process in the event of a terminal condition. The law of each state is unique, so that it is important to assure that one's health care documents not only reflect one's own decisions but also are consistent with the pertinent state law.

Additionally, the federal government recently implemented strict new privacy policies under the Health Insurance Portability and Accountability Act ("HIPAA"). It is important to assure that one's health care documents also comply with the new HIPAA policy or the unintended result may be that one's health care agent may not have access to information regarding one's health and medical records when circumstances require it.

The purpose of this summary is not to give state-by-state examples or advice but, rather, to bring to your attention certain recent developments in the law which might encourage you to review your estate plan. We cannot evaluate whether your estate plan should be modified in any way at this time without discussing all of these considerations with you directly. The best way to proceed is for us to arrange a time to meet or at least initiate this discussion by telephone. We can then determine whether for tax and/or personal reasons changes should be considered to your estate plan and proceed accordingly. If a decision is made that no changes are required at this time, such decision will have been made taking into account all of the relevant criteria.

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

We look forward to hearing from you and to assisting you as necessary. Please contact Frank Cooper, chair of our Estates and Asset Planning Practice Group.

Duane Morris LLP, among the 100 largest law firms in the United States, is a full-service firm of more than 600 lawyers. In addition to legal services, Duane Morris has independent affiliates employing approximately 100 professionals engaged in other disciplines. With offices in major markets, and as part of an international network of independent law firms, Duane Morris represents clients across the nation and around the world.

United States: Is Your Estate Plan in Order?

Login to Mondaq.com

Why Register with Mondaq

Your Organisation