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Financial Planning > Trusts and Estates > Estate Planning

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How might the portability provisions of the 2010 Tax Relief Act affect surviving spouses who remarry? What new opportunities can advisors pursue to revamp defective life insurance or estate planning transactions? Why should children who are procreated using alternative methods merit special attention in estate plans?

Answers to these questions, among others, were forthcoming during a wide-ranging closing general session of the Society of the Financial Service Professionals’ Clinic for Advanced Professionals, held at the Marriot Philadelphia Airport hotel, August 16-17. The presenters, Lawrence Brody and Kathleen Sherby, both partners at the law firm Bryan Cave LLP, St. Louis, addressed the impact of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 on estate and business planning practices, including opportunities and issues arising from the legislation.

Among the items of concern: a portability feature that lets a surviving spouse take advantage of an unused estate tax exemption (a.k.a., applicable exclusion amount or unified credit) of a predeceased spouse. Due to expire at the end of 2012 unless extended by Congress, the portability provision requires the “timely” filing of an estate tax return to capture the unused exemption.

According to Sherby, portability sounds like a great thing, but there are problems with it, both conceptually and with its process.

“As it regards the concept, portability isn’t indexed to inflation,” she said. “So–10 or 20 years later–you get whatever the unused exemption amount is. If the assets of a surviving spouse grow considerably, the exemption might not cover the individual.”

Sherby noted also that a surviving spouse might not be able to use the exemption after remarrying. If the individual’s second spouse dies, the unused exemption of the deceased spouse from the first marriage is no longer available to the remarried surviving spouse because the portability feature only applies to the last deceased spouse’s unused exclusion amount.

“If you marry someone who is a lot richer than your first spouse, and that spouse dies before you do, you lose the benefit of your first spouse’s unused exemption,” said Sherby. “And you now have the wealthy second spouse’s unused exemption–which may be nothing.

“So if you have a poor spouse who predeceases you, you may not want to marry a rich spouse. Instead, you might simply choose to live together. Or you get married and make lifetime gifts of the unused exclusion amount.”

Brody humored the audience by suggesting the portability provision may avail enterprising individuals who plan to remarry of an unconventional sales opportunity: posting the unused exemption as a classified ad on

Here’s my proposed heading: ‘Old, Poor, Unhealthy Widower: Full Exemption Available,’” said Brody. “‘At a reasonable cost, my exemption is available to you. Here’s my contact info…’”

Skipping a Generation

Sherby pointed out other problems with the 2010 tax law provision. Among them: the lack of portability for the generation-skipping transfer (GST) tax–a federal tax imposed on gifts and transfers in trust to or for the benefit of (among others) grandchildren. Other concerns include; uncertainty as to the long-availability of portability; and, as regards Sherby’s process concern, the requirement that an executor of the predeceased spouse’s estate file an estate tax return and elect to permit the surviving spouse to use the unused exemption.

Because of these issues, said Sherby, clients may be well advised to use in place of the portability feature a credit shelter trust. Also referred to as an A/B trust, bypass trust and unified credit trust, the vehicle lets a surviving spouse avoid estate tax at a first spouse’s death by using the available federal estate tax credit or applicable exclusion amount.

Turning to life insurance, the speakers noted the 2010 Tax Act’s increased lifetime estate, gift and GST exemptions–under the law, gift, estate, and GST rates and exemptions are reunified at $5 million per person or $10 million per couple (indexed for inflation) and at a 35% top tax rate–will avail advisors of opportunities to “fix” broken insurance or estate planning transactions.

These include split-dollar and private premium financing transactions that are “under water;” and installment sales to intentional grantor trusts, where an asset fails to appreciate or to generate enough cash to make the required payments.

In cases involving split-dollar or private premium financing arrangements that were created without an “exit strategy” to allow the advances or loans to be repaid during an insured’s lifetime, the increased gift and GST exemptions could provide “side-funds” for such an exit strategy.

“Even if the split-dollar or premium financing arrangement or the installment sale is not under-water, having the lender or seller forgive all or part of the loan, advance, or note would simplify the transaction,” said Brody. “And if an installment sale relied on guarantees to give the transaction substance, a gift of the increased exemption may allow the guarantees to be released.”

What the Future Holds

The panelists closed out the general session by prognosticating on forces that might shape the future of estate and financial planning practices.

In respect to the 2010 Tax Act, which sunsets provisions of the 2001 Economic Growth and Tax Relief Reconciliation Act at the end of 2012, Brody suggested several scenarios, three of which envision: (1) Congress doing nothing and allowing EGTRRA to expire; (2) Congress extending the 2001 tax law provisions for another two years; or (3) Congress making permanent the provisions, including the higher exemption amounts enacted in 2010.

But if the last were to happen, said Brody, Congress may repeal the estate tax with or without a modified carryover basis regime–a limited “step-up” in an inherited property’s “basis” or purchase price plus the value of certain improvements–because relatively few returns will be filed at the $5 million per person exemption amount.

Tax law aside, Sherby said a number of factors, including changing demographics and lifestyles, the rapid growth of knowledge, globalization, and the digitalization of information will “profoundly impact” advisors’ practices.

Sherby noted, for example, that many young people are choosing not to marry or are marrying when it’s too late to have children. As a result, there are a large number of couples who, without having kids to bequest assets to, will have to explore estate planning alternatives in later years.

What must also be addressed in estate planning documents, said Sherby, is the disposition of assets in respect to children who are “procreated using alternative methods,” such as surrogate parenting or contract pregnancy; and the managing of assets of households with only a single parent. If estate planners don’t adapt their documents to reflect these new realities, Sherby warned, then they risk exposing their clients to time-consuming litigation.

“Forty percent of births last year were to single mothers,” said Sherby. “That’s astounding. We have to deal with these new family dynamics.”

Sherby pointed up other demographic trends that hold implications for estate planners. Among them: an increase in the number of children in grandparent-headed households (up 30% for the decade ended 2000); an aging population, one consequence of which will be greater stress on retirement plans and governmental benefits; and changing views among the Gen-X and Millennial generations (vis-?-vis their parents and grandparents) about the objectives of trusts and estate planning.

Because of concerns about the future of Social Security and the retirement system, said Brody, clients are also establishing trusts for the benefit of children that don’t pay out until the kids reach age 65.

Clients who move from place to place, added Brody, will have to be mindful of changes to applicable laws regarding the administration of property when these trusts do kick in. Because of globalization, a growing number of people will be affected by differences in laws across jurisdictions, including U.S. citizens who have interests overseas and, conversely, foreigners who have interests–businesses, real estate, children, and grandchildren–in the U.S.

When drawing up wills and other estate planning documents, said Sherby, clients will also have to ensure that beneficiaries can access password-protected accounts.

“Most young people now do their banking online and all of their accounts are password-protected,” said Sherby. “Should something happen to them and you don’t know their passwords, you won’t be able to determine what assets they have. So we need to have a way to keep the passwords protected, yet make them available to survivors if something happens to someone.”


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