What will congress do now?

• Nothing — I originally wouldn’t have given this one much chance, but now I see this as a distinct possibilty
• Reinstitute 2009 exemptions retroactively (may be unconstitutional)
• Reinstitute 2009 exemptions non-retroactively

Current Law for 2010

Beneficiaries receives property with an adjusted basis equal to the lesser of the decedent’s basis or the asset’s fair market value on the decedent’s date of death. Thus, EGTRRA eliminates the automatic “step-up” to the date of death value but retains the “step-down” for depreciating assets.

To offset this loss of the step-up in basis, EGTRRA provides that the executor (or other person responsible for the decedent’s property) may allocate a $1.3 million “aggregate basis increase” on an asset-by-asset basis up to the particular asset’s fair market value at the date of the decedent’s death. Assets left to a spouse may receive an additional $3 million “spousal property basis increase,” also asset-by-asset, up to the particular asset’s fair market value at the date of the decedent’s death.

Gotchas – Credit Shelter Trust Funding Formula

Under a typical living trust or will, the document creates at least two trusts, a credit shelter (aka bypass or Family) trust and a marital trust (possibly with QTIP provision).  The credit shelter trust funding formula clause often says something like: the amount of the decedent’s property that will pass to the credit shelter trust equals the “maximum amount that can pass free of federal estate tax;” the balance of the decedent’s assets pass to the marital trust.

If the client dies in 2010, this estate planning language will cause the unintentional over-funding of the credit shelter trust and under-funding of the marital trust. When the credit shelter and marital trusts contain identical beneficiaries and dispositive provisions, this over-funding of the credit shelter trust and under-funding of the marital trust is not a big deal. However, if the credit shelter and marital trusts contain different beneficiaries and/or different dispositive provisions, this may cause unintended and undesirable consequences.

For example, with second or subsequent marriages, and in particular where there are children from a prior marriage, the the surviving spouse’s rights is limited to the income from the marital trust, while the children from the prior marriage are often the beneficiaries of the credit shelter trust. If the client dies in 2010, all of the client’s assets will pass to the credit-shelter trust, and the marital trust – i.e., the surviving spouse – will receive nothing! This is certainly not what was intended and it will not provide the state’s statutory minimum to the surviving spouse. With few or no assets left to the surviving spouse, he or she may resort to a lawsuit against the trust or estate for the statutory minimum, thereby increasing legal fees and wreaking havoc with the estate plan.

The reverse can also be a problem if the funding language refers to the exemption amount.  In that case the money will all go to the marital trust and none will go to the credit shelter trust.

Gotchas – Lifetime Powers of Appointment

If the surviving spouse has a lifetime power of appointment over the QTIP trust the executor (or other person responsible for the decedent’s property) cannot allocate the spousal basis increase to marital trust property. Alternatively, the executor can allocate the spousal property basis increase to QTIP property over which the surviving spouse has only a testamentary power of appointment.

For example

• Copy of your will
• Copy of insurance policies
• Titles to your house and cars
• Detailed list of bank and brokerage accounts, CDs and credit cards
• Marriage license / Divorce decree
• Expensive, rarely-worn jewelry
• Birth certificates
• Family heirlooms
• Stock and bond certificates

But some items should not be kept in a safe deposit box because they may be sealed away shortly after death causing delays and administrative problems for the executor and heirs.

• Original Will
• Original Trusts
• Powers of Attorney

These items should be kept in a fire proof safe.  Don’t have a fireproof safe?  Consider using your freezer.  By putting the document in a ziplock bag and placing it in your freezer you have an instant poor man’s safe.

• www.zillow.com
• www.trulia.com

The basic idea is to turn a credit shelter trust into a grantor trust of the surviving spouse. This allows the surviving spouse to pay the taxes on the trust income without those payments being considered a gift. This is accomplished by creating a lifetime QTIP trust which will then fund the credit shelter trust. You can find the details here.

Since you only receive a large benefit from this technique if the surviving spouse lives for many more years, I don’t think the additional complexity would be worth it unless you knew there was likely going to be a big difference in their life expectancies. For example, if one spouse has come down with terminal cancer while they are both relatively young (and of course they need a lot of money that would seem to make them good candidates for this technique. It also solves the problem of having to worry about the reciprocal trust doctrine.

Here is a form letter you can modify for your needs to rectify the situation. Those in community property states will need to change the wording since you typically put the property into a single family trust.

Mr. and Mrs. John Doe
123 Main St.
Anytown, ST, 12345

December 8th, 2006

Re: Policy No. __________________

We have conveyed our real property insured by the above referenced
policy one-half (1/2) into each of our Revocable Living Trusts. We have
enclosed a photocopy of each of our Short Form Trusts. These Trusts are
identified as follows:

1. John Doe, Trustee of The John Doe Trust Dated September 1, 2006
2. Jane Doe, Trustee of The Jane Doe Trust Dated September 1, 2006

Please have our Trusts named as additional insured under the above policy.

Thank you for your assistance.

Sincerely,

John Doe

Jane Doe

Avoid springing powers of attorney (POA) because the Health Insurance Portability and Accountability Act (HIPAA) and other considerations making springing powers increasingly problematic. Instead POAs should be immediate. If this is uncomfortable then the wrong person is being chosen for this power. Surprisingly, Tim stated that in the over 1200 Durable Financial Powers of Attorney’s that he has helped execute, he does not know of a single case where it was abused.