BEFORE PASSAGE OF THE 2010 TAX ACT:

2010 has brought the suspension of the federal estate tax and the federal generation-skipping transfer tax and the introduction of the carryover basis system. It is possible that these rules will endure for the duration of 2010, and be replaced by the laws effective for 2011, which will result in the restoration of the federal estate tax and the generation-skipping transfer tax and the elimination of the carryover basis system. It is also possible that changes will be made in 2010 that will be prospective only – or that will be made retroactive to January 1, 2010. If made retroactive, it is not certain if the courts will sustain a retroactive application of whatever rules are enacted. It is also possible that some of the 2010 rules expected to expire in 2011 will be continued.

Uncertainty reigns. Advisors cannot tell their clients with any degree of certainty what the law will be if they should die during 2010. Unfortunately, what is certain is the fact that the estate planning documents executed by many clients simply do not work in light of the changes in the law in 2010. Strictly speaking, formula clauses that made sense in prior years because they referred to concepts such as “the federal estate tax” or the “credit shelter” or the “marital deduction” or the “generation-skipping exemption” do not make sense in 2010 when these concepts technically do not exist in the law. References to these formulas need to be clarified or redefined in light of the 2010 law changes.

Most plans make no provision to address the complex modified carryover basis rules allowed in 2010. Which beneficiaries are granted the basis increases? Who decides how this should be done?

What of the client who dies in 2010 a resident of a state that has decoupled from the federal estate tax system which has its own estate or inheritance tax with a defined exempt amount? How should that person’s state tax exemption be handled if there is no federal estate tax?

The purpose of these materials is to offer some suggested alternative clauses and provisions to include in estate planning documents that may need to be modified in 2010. Where necessary, these suggested materials may need to be adjusted slightly to distinguish  property passing under a will from property passing as part of a trust agreement.

If the client’s estate is so minimal and the client’s plan of disposition so simple that taxes and distributions to heirs are a non-factor, nothing need be done to his or her plan. If the client is certain that death will not occur in 2010, nothing need be done to his or her plan. For everyone else, their plans should be reviewed and depending on the complexity of the plan, the family issues involved, and the size of the clients’ estates, some of the materials provided below may be considered to be appropriate for adaptation to supplement and clarify their estate planning documents.

Here are the 14 Important Issues for which Mr. Siegel has drafted 23 Useful Clauses:

Issue 1: Minimize the changes needed in the client’s estate plan

Issue 2: Consider leaving everything to a family trust

Issue 3: If no federal estate tax exists, there is no need to create a marital deduction share

Issue 4: Limit the transfer to the surviving spouse to the modified carryover basis adjustment amount

Issue 5: Divide the estate into shares for the spouse and others by formulas, but impose caps or floors

Issue 6: Divide the estate into shares, but try to get an optimal use of carryover basis modifications while doing so

Issue 7: Achieve the division of the estate and the modified carryover basis adjustments and also address optimal funding of the shares of the estate in a State that has decoupled from the federal system and retained a State estate or inheritance tax

Issue 8: Stand alone carryover basis provisions

Issue 9: Exonerate the fiduciary from carryover basis decisions

Issue 10: Maximize transfers to grandchildren and other skip persons to take advantage of the suspension of the generation-skipping transfer tax

Issue 11: If there is no surviving spouse, consider transferring the entire estate to a trust for the ultimate benefit of skip persons

Issue 12: Combine the GST exemption opportunity with an outright transfer to the surviving spouse in an amount equal to the maximum modified carryover basis adjustment

Issue 13: Give discretionary authority to a Trust or Estate Protector to allow the holder of that office to make the necessary adjustments in the estate plan to address the 2010 law changes

Issue 14: Use a QTIP Trust with disclaimer provisions to a Nonmarital Trust to avoid some of the complications of trying to both allocate specific amounts of property to each share of the estate and fine tune the carryover basis adjustments

Author:

Steven G. Siegel is president of The Siegel Group, a Morristown, New Jersey - based national consulting firm specializing in tax consulting, estate planning and advising family business owners and entrepreneurs. Mr. Siegel holds a BS from Georgetown University, a JD from Harvard Law School and an LLM in Taxation from New York University.

He is the author of several books, including: Planning for An Aging Population; Business Entities: Start to Finish; Taxation of Divorce and Separation; Income Taxation of Estates and Trusts, Preparing the Audit-Proof Federal Estate Tax Return, Putting It Together: Planning Estates for $5 million and Less, Family Business Succession Planning, Business Acquisitions: Representing Buyers and Sellers in the Sale of a Business; Dynasty Trusts; Planning with Intentionally-Defective Grantor Trusts; The Federal Gift Tax: A Comprehensive Analysis; Charitable Remainder Trusts, Grantor Trust Planning: QPRTs, GRATs and SCINs, The Estate Planning Course, The Retirement Planning Course, Retirement Distributions: Estate and Tax Planning Strategies; The Estate Administration Course, Tax Strategies for Closely-Held Businesses, and Tort Litigation Settlements: Tax and Financial Issues.

Mr. Siegel has lectured extensively throughout the United States on tax, business and estate planning topics on behalf of numerous organizations, including National Law Foundation, AICPA, CCH, National Tax Institute, National Society of Accountants, and many others.  He has served as an adjunct professor of law at Seton Hall and Rutgers University law schools.

The Siegel Group provides consulting services to accountants, attorneys, financial planners and life insurance professionals to assist them with the tax, estate and business planning and compliance issues confronting their clients. Based in Morristown, New Jersey, the Group has provided services throughout the United States. The Siegel Group does not sell any products. It is an entirely fee-based organization.

Contact the Siegel Group through its president, Steven G. Siegel, e-mail: steve@siegel.net.

*RELATED CLE COURSES, "Critical Estate Planning Decisions: 2010, 2011 And Beyond" by Steven G. Siegel.  Go to www.nlfonline.com for the online course available 24/7 and to www.nlfcle.com for the course on Audio CD or DVD. On both web sites, for CLE credits, please click on your state (or any state if you don't care about getting CLE credits) and then, under "Estate Planning", and scroll down to this title. (This course is not available for New York CLE Credits.)