Florida Wills & Trusts
Legal Developments
Tax Relief Act of 2010 Signed Into Law
On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 became law. The Tax Relief Act (TRA 2010) includes a comprehensive set of income tax and unemployment insurance provisions in addition to the transfer tax changes most important to us. We have provided a brief analysis of the changes in the Memorandum at the end of this update letter.
To view questions affected by TRA 2010, open the flag file named “Up_Jan11.flg” which flags questions with new or revised Law & Strategy commentary.
Updated Product Features
New Power to Nominate Co-Trustee Option Added
The person(s) who have the power to nominate successor trustees in Question 822 ("Power to Nominate Successors") now have the option to also nominate co-trustees. New Question 823.
Email Option Added to Attorney Information for Cover Page and Footers
You may now enter an email address as part of the attorney information questions. The email will appear on the Cover Page if you select the revised choice labeled “Yes, with full attorney information.’ It is also a new Trust and Will footer option. New Question 1377 and Questions 1103, 1105 and 1106.
New Custom Provision Questions Added
New questions have been added at the end of each major section in the Navigator for Wills and Trust documents to provide the user greater drafting flexibility in order to add your own custom text. You have the option of adding text either as standalone text or with a section heading. Also, the custom text will automatically become part of a template should you wish to create a template from your client answer file. For more information on creating templates see “Creating Templates for Estate-Planning Products” in the “Using Templates” topic in System Help by selecting HELP from the Lawgic menu. New Questions 133-135, 159-161, 178-180, 194-196, 203-205, 213-215, 231-233, 235-237, 360-362, 428-430, 465-467, 529-531, 587-589, 634-636, 652-654, 848-850, 871-872, 905-907, 978-980, 995-997, 1058-1060.
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To view those questions that are new in this update, or whose Law & Strategy, choices, or default answers have changed, use the "Up_Jan11" flag file. From inside Lawgic, open any existing answer file; on the Flags menu, click Open Flags, select the appropriate Title (click OK), and next select the "Up_Jan11" flag file (and click OK). To view all flagged questions, click Expand All on the Answers menu and scroll the Navigator. Flagged questions will be indicated with bold text.
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Copyright (c) 2011 Lawgic, LLC, a Florida limited liability company (“Lawgic”).All Rights Reserved. Lawgic and Intelligent Legal Technology are registered trademarks of Lawgic, LLC.
Prepared January 2011 by Richard L. Stockton, Holland & Knight LLP
Tax Relief Act of 2010 Signed Into Law
On December 17, 2010, the President signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The Tax Relief Act (TRA 2010) includes comprehensive provisions dealing with income tax; estate, gift and generation-skipping tax; payroll tax; and extensions of unemployment insurance. It extends the existing income and other tax rates, which were set to expire on December 31, 2010, for two more years, through December 31, 2012. The transfer tax provisions will also sunset in 2013 (unless extended) and revert to pre-EGTRA levels.
The transfer tax provisions of the Act are found in Sections 301 to 304, just over 4 pages long and slightly fewer than 1,900 words. But they are GOOD words. In fact, it is the most concise, cleanest bit of code writing we have seen in a long time. It quite elegantly cleans up issues that estate planners have struggled with for over a year, and does so fairly, and in some cases, generously to the taxpayer. If there is a common complaint about the changes, it might be that they are only temporary. The blessing of peace will be upon us for 24 months, with the faint hope of a permanent solution at the end of the road.
Topics of the new act that relate to Estate Planning:
ESTATE TAX:
The Bad News: The estate tax was reinstated retroactively to January 1, 2010. The default rule is that all decedents dying in 2010 are subject to estate taxation.
The Good News: The Applicable Exclusion Amount for 2010 was raised to $5,000,000 (from $3,500,000 in 2009), and the maximum tax rate was lowered to 35%. The basis for assets in the estate is now the fair market value of the assets at death.
The Better News: Though taxation is the default rule, estates can elect out and be treated as if TRA 2010 had not been enacted, preserving the tax-free status for larger estates, but at the cost of retaining carryover basis for the transferred assets (subject to certain adjustments), and the need to file an election (the form and manner of which is not yet determined).
In addition to the dramatic increase of the Applicable Exclusion Amount per individual for the years 2010 through 2012, the unused exclusion of the first spouse to die can be passed on to the surviving spouse for use against his or her estate tax (the so-called "portability" of the exclusion). This means that a family having a net worth of $10 million can pass their entire estate to others without an estate tax (in theory, and assuming both die within the next 2 years). Portability was intended to simplify estate planning, but has several disadvantages that came along with it: it can be lost after remarriage, even though the assets that would have been covered by it remain taxable; it does not apply for GST purposes; and an estate tax return at the first spouse's death--to qualify for portability--may become the standard practice even for smaller estates.
GIFT TAX:
Reunification of the Estate and Gift tax structures will simplify planning and provide opportunities for the vast majority of taxpayers to become indifferent to transfer tax issues. The exclusion for gifts was kept at $1 million through the end of 2010, but jumps to $5 million as of 2011, with the same maximum rate of 35%.
If the changes to the tax survive past 2012, the estate and gift tax start to look like a flat rate tax. The bracket ride--the difference between the base tax where the highest marginal rate begins, now at $500,000, and a flat tax on that amount at the highest rate--is now less than $20,000 for every estate, regardless of size.
GST TAX
Because the AEA rose to $5 million, the GST Exemption has risen with it. And the rate of tax for GST transfers has likewise dropped from its threatened 55% to the maximum estate tax rate of 35%. Two other GST benefits were contained in TRA 2010. For estates of decedents electing out of the estate tax in 2010, many of the GST concepts that were, at best, murky under EGTRA have been cleaned up and made usable again. But the best early holiday gift was the elimination of all GST tax on generation-skipping transfers in 2010. Those were the days.
TELL US ABOUT IT
Because of the turmoil surrounding these and other changes, Congress included in the Act a generous extension of the deadline for filing any transfer tax returns relating to 2010 (though limited to events occurring before the date of enactment). The due dates for estate tax returns for decedents wishing to be taxed in 2010, or rather, preferring not to opt out; gift and generation skipping tax returns for transfers during 2010; payment of any taxes due; and for filing a disclaimer for any transfer of property from a decedent in 2010, are all extended. The common deadline for all of these requirements is now 9 months after the date of enactment, which ironically falls on September 17, 2011, a Saturday, giving 2 extra days to get caught up. (For those needing even more time, how about that automatic 6 months' extension? Might work. Try Form 4768.)
The Future of Formula Clauses and Use of Trusts:
Planners love formula clauses because they simplify drafting. Don't know how much will pass tax-free to other family members? Make the words do the math for you, depending on what we have available when the clause kicks in (i.e., at the client's death). As we saw in 2010, however, sometimes Congress can throw us a curve and change the basic assumptions that underlie such valuable clauses. And now, with a taxability threshold so high that for the rank and file upper middle class family the estate tax is effectively repealed, we should re-evaluate how we use our formula clauses. We could: push more into a trust for the spouse, whether taxable or non-taxable at the second death; increase flexibility within the trusts, because many things can be done if taxes are not in play; increase the ways to fund trusts; and rethink the timing of when to use trusts for both the spouse and other family members.
Given the higher amounts that can pass without tax, there will likely be greater resistance to creating trusts for the family, and we will need to counsel our clients on the benefits of trusts in a tax-less environment. Just a few: asset protection-creditors; asset protection-subsequent spouses; professional (or even quasi-professional) management of assets; income tax shifting; privacy; extended control of assets for unready beneficiaries; freezes tax value to prevent inflationary pressures that can create a taxable situation; portability of the spousal exclusion is not a sure thing; much better generation-skipping planning for the unknowable future (tax and otherwise); and the most important of all…we may be doing all of this again in 24 months.