January 29, 2010
To Our Clients, Former Clients, and Friends:
This letter is being sent to you because you are a colleague, a friend, a client, or a former client of The Rushforth Firm, Ltd. or a firm with which attorney Layne Rushforth was previously affiliated. We are sending this letter to make you aware of the current status of the estate tax law and to suggest that you may wish to review your estate-planning documents, whether or not taxes are a concern.
One-Year Estate Tax Repeal?
Due to Congressional inaction, the estate tax and the generation-skipping tax were automatically repealed as of January 1, 2010 for individuals dying during 2010 and for generation-skipping transfers made in 2010. Unless and until Congress modifies the Internal Revenue Code, on January 1, 2011, the estate tax and generation-skipping tax will again be effective with rates up to 55% (instead of the 45% rate that applied in 2009) and an exclusion of $1,000,000 (instead of the $3.5 million exclusion that applied in 2009). We expect a change in the law, but we cannot predict what or when.
The federal gift tax remains in effect, with some changes. Gifts of more than $13,000 ($26,000 per couple) during 2010 are taxable, cumulative lifetime taxable gifts of more than $1 million ($2 million per couple) will trigger a gift tax, and gifts made in 2010 are taxed at 35%.
Like the tax- and estate-planning community at large, we expected that Congress would amend the tax laws before the end of 2009 to prevent this result. In 2009, we thought it would be prudent to wait for Congressional action before considering tax-related changes to estate-planning documents. Unfortunately, now that 2010 has come without Congressional action, some wills and trusts contain tax-related clauses that do not work as intended under the law as it presently exists.
Do My Documents Need to Be Changed?
Because there is a possibility that the estate tax may not apply in 2010 and a possibility that the estate tax exclusion in 2011 will revert to $1 million, we recommend that you review your will or trust immediately. Even though we consider both possibilities unlikely, we suggest that you contact us to discuss your will or trust if any division or distribution of assets depends on the marital deduction, the federal estate tax, the unified credit, the applicable exclusion amount for the estate tax, and/or the generation-skipping transfer tax.
For example, if you have a trust that divides into subtrusts when one spouse or partner dies (e.g., a “Credit-Shelter Trust”, a “Decedent’s Trust”, a “Survivor’s Trust”, and/or a “Marital Trust”), and all of those trusts end up going to the same beneficiaries on the same terms and conditions, the lack of an estate tax in 2010 will probably make little or no difference with respect to how trust assets will ultimately be distributed, depending on how your trust is worded. On the other hand, for couples who have different beneficiaries for the different subtrusts especially if the surviving spouse or partner is excluded as a beneficiary from one or more of the subtrusts a modification may be very important to make sure your intent is not frustrated.
Similarly, if your trust contains a formula creating a grandchildrens trust at your death with the maximum amount that can pass free of the generation-skipping transfer tax (GST tax), your death in 2010 could result in 100% of your estate going into such a trust, perhaps leaving nothing for your children or other beneficiaries.
In short, if tax clauses or tax-related formulas make a difference as to who gets what, leaving your trust unmodified may have significant unintended consequences. The greatest potential for unintended consequences exists when each spouse or partner has different beneficiaries and assets are allocated based on a tax-based formula. The problems can be amplified when the one spouse or partner has significant separate property.
Before deciding if you want to make changes to your will or trust, you need to answer these questions: (1) How would I plan my estate if there were no estate tax and no GST tax? (2) How would my planning change if the law is re-enacted with a $1 million exclusion for both of those taxes? (3) How would my planning change if the law is re-enacted with a $3.5 million (or larger) exclusion for both of those taxes? (4) How does my current plan compare with what I really want?
Effective for people who die in 2010, there is a limit to the assets that will have their income tax cost basis adjusted to date-of-death values. For couples who have assets with significant appreciation, estate planning documents may need to be modified to maximize the assets that are entitled to the date-of-death basis adjustment when one spouse or partner dies.
What is Congress Going to Do?
It is impossible to predict how and when Congress will ultimately modify the tax laws. The House of Representatives tried to maintain the status quo by passing a bill that would have maintained the transfer tax rates and terms at their 2009 levels. The Senate could pass a similar bill in 2010, making it retroactive to January 1, 2010. Even if this happens, any retroactive enactment might be subject to a constitutional challenge, but the United States Supreme Court has upheld retroactive tax legislation in the past, and we would expect that result if Congress acts relatively soon.
2010 Planning Opportunities?
The current tax law including the 35% gift tax rate and the lack of a GST tax combined with recession-reduced asset values may provide a once-in-a lifetime gift-planning opportunity. We will be happy to discuss potential tax-planning techniques under 2010 law, but if you choose to rely on current law, you will be assuming the risk that the law could be changed retroactively.
Whether or not taxes are a concern for you, if your estate planning documents have not been revised since 2001, they are almost certainly out-of-date and should be reviewed. We suggest that you consider the following:
1. All of the assets you want governed by a trust or business entity (such as a corporation, limited partnership, or limited-liability company) must be owned by the appropriate trust or business entity. If Nevada real property is involved, we can prepare the appropriate deed(s). If you have non-Nevada real property that is not in the name of a trust, we encourage you to arrange to sign and record a deed conveying that property into the name(s) of the current trustee(s). We recommend that this be done by an experienced estate-planning attorney, but you can elect to have this done through a title company or through a service such as Udeed (http://udeed.com).
2. It is always good to periodically review your estate planning documents to make sure the designations of beneficiaries and fiduciaries (e.g., executor, trustee, guardian, agent under a power of attorney, etc.) are consistent with your current wishes. Even with irrevocable trusts where beneficiaries cannot be changed, the trust may permit you or someone else to modify the trustee designation.
3. Be sure to sign a health-care power of attorney using a form that contains provisions consistent with the new Nevada law that became effective October 1, 2009. A suggested health-care power of attorney form and a related memo are found on our web site (http://rushforth.net).
4. Make sure your trust is up-to-date and compliant with the laws of the state in which you wish the trust to be governed. We can amend your out-of-state revocable trust to be governed under Nevada law, and even some irrevocable trusts can be modified to be Nevada trusts. If you have a revocable trust or will that was signed when you were a Nevada resident, but you have moved out of state, you might also consider updating your trust or will with someone who is licensed in the state in which you now reside. If you have moved to California (where Joey is licensed) or Utah (where Layne is licensed), we may be able to assist you to modify your trust to comply with the laws of those states. To find a qualified trust and estate attorney in other states, go to the web site of the American College of Trust and Estate Counsel (http://www.actec.org), and click on Find an ACTEC Fellow.
If you would like to go over your trust or other estate-planning documents with us, please contact the office to schedule an appointment with one of us. Because many trusts will require no change, to our existing and former clients for whom we prepared one or more trusts, we offer a no-charge 15-minute telephone consultation to briefly go over your trust and to decide if a more detailed review and discussion are merited. In many cases, a simple amendment is all that will be necessary; however, in some cases, more significant revisions may be appropriate. One of us (Joey or Layne) will be able to give you an estimate of the changes after we review your documents. Except for the first 15 minutes of the scheduled telephone consultation with existing and former trust clients, all time will be billed by the hour at our standard hourly rates. We have enclosed a recently updated memo outlining our current fee and billing policies.
The Next Step Is Yours
Please contact one of us if you have any questions or if you wish to be removed from our mailing list. For quick and simple questions, we encourage you to send them by e-mail or by fax.
Regardless of whether or not you need our services, we extend our best wishes for a happy, healthy, and prosperous 2010.
LAYNE T. RUSHFORTH
JOSEPH J. POWELL
© Copyright 2010 The Rushforth Firm, PLLC. All rights reserved.