• An estate does NOT qualify
• A charitable organization does NOT qualify
• A living trust MAY qualify

When will a trust qualify as a “designated beneficiary?” See Treas. Reg. § 1.401(a)(9)-4.

• Trust must be valid pursuant to state law and irrevocable (upon death of participant is sufficient)
• Only individuals may be beneficiaries and beneficiaries must be identifiable
• By October 31 of the calendar year following the participant’s death, trustee must provide to the administrator either (i) a copy of the trust or (ii) a list of all beneficiaries of the trust

THE BAD: Unless the trust includes specific “Stretch IRA Trust” or “Conduit Trust” language and the beneficiary designations are properly updated, even if the trust is treated as a “designated beneficiary,” the OLDEST trust beneficiary is used for purposes of determining the distribution period for the minimum required distribution. Treas Reg § 1.401(a)(9)-4.

• Look through the trust to the life expectancies of ALL beneficiaries – including contingent beneficiaries and identify the beneficiary with the shortest life expectancy (oldest beneficiary). Treas. Reg. § 1.401(a)(9)-5, Q&A 7(c); See also PLR 200228025 (April 18, 2002).

THE UGLY: If a traditional living trust is the beneficiary…there is the potential for increased complications!

• Marital Trust Problem: If retirement assets are used to fund the marital trust (a.k.a QTIP Trust), issues arise if a charity is an ultimate beneficiary, and excess income taxes may be incurred. The QTIP Trust may receive a required minimum distribution from the IRA that is greater than the income earned by the IRA and the income will often be taxed at the maximum federal income tax rate.
• Credit Shelter Trust: Often the surviving spouse is the applicable measuring life for purposes of the minimum required distribution. The income tax liability associated with the minimum required distribution depletes the assets of the credit shelter trust. But, if assets are distributed to the surviving spouse, this is counter to the purpose of the credit shelter trust.
• These issues can be avoided if (i) your existing living trust is amended to include “Stretch IRA Trust” or “Conduit Trust” language which would enable for maximum income tax planning; and (ii) your beneficiary designations are properly updated to correspond with those changes.

III.  Planning Advice

• Generally, from a tax perspective and in an effort to ease administrative burdens, it is best to appoint an individual beneficiary (vs. a trust);  name several contingent beneficiaries so that “disclaimers” / post-mortem planning is an option.
• If a client insists on using a trust, consider drafting a 401k trust (also known as a “Stretch IRA Trust” or a “Conduit Trust”), a trust customized to ONLY hold the retirement plan beneficiary designations and circumvent some of the traditional problems associated with naming a trust as a designated beneficiary.
• If beneficiary designation is a living trust, include customized language that allows the trustee to accelerate the distribution to any disqualified beneficiary before the September 30 after grantor’s death, or try to have “bad beneficiaries” disclaim interest before September 30 date – not always an option.

We would be happy to discuss your particular circumstances and review your existing estate planning documents and beneficiary designations to ensure effective estate planning and income tax planning.

On Friday, December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) into law. For 2011 and 2012, the Act effectively reinstated the estate and generation-skipping transfer (“GST”) taxes and fixed the federal estate tax exemption amount at $5 million per person with a maximum estate tax rate of 35%. The Act also increased the lifetime gift tax exemption from $1 million to $5 million, unifying the gift tax with the Federal estate tax exemption. The provisions of the Act cover 2011 and 2012 only. Thus, they are only temporary and push the fate of the federal estate tax regime to be decided in 2012, a presidential election year.

Historical Perspective:
The modern estate tax dates back to 1916, when a tax rate of 10% was imposed on the portion of estates in excess of $50,000. Since then, rates and exemption amounts fluctuated, eventually reaching a high of 77% from 1941 – 1976 with an exemption of $60,000.

More recently, in 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), commonly known as the “Bush tax cuts”. EGTRRA gradually increased the applicable exclusion amount, lowered the maximum estate tax rate and repealed the estate tax completely for decedents dying in 2010.

2009 and 2010 proved to be critical years in the estate tax regime at the Federal and state levels. Specifically, for residents of Illinois, the estate tax exemption at the state level differed from the estate tax exemption at the federal level. Thus, for many residents of Illinois, this “decoupling” (divergence of the Illinois estate tax exemption and the federal estate tax exemption) may have resulted in $209,124 of Illinois estate tax at the first spouse’s death. On January 13, 2011, SB 2505 was signed into law by Governor Pat Quinn, which fixed the Illinois estate tax exemption at $2 million and effectively “decoupled” the Illinois estate tax exemption from the federal level once again. This new legislation may result in $352,158 of Illinois estate tax at the first spouse’s death. However, the imposition of this tax can be avoided with proper planning. (See “Illinois Decoupling” discussed below).

Similarly, 2010 proved to be a watershed year as the federal estate tax exemption amount was unlimited. As a result, commentators joked that 2010 was a wonderful year to die. However, for many clients who died in 2010, the income tax consequences were severe as decedents were not granted the traditional “step-up in basis” for all assets. Rather, the 2010 regime required beneficiaries to take the decedent’s “carry-over basis”, subject to certain exceptions. As a result, some existing trusts prevented beneficiaries from maximizing the allocation of basis and resulted in tremendous unexpected income taxes.

New Legislation and What it Means to You

Return of the Estate Tax: The new law brings back the federal estate tax with an exemption amount of $5 million per person in 2011 (and the 2012 exemption will be indexed for inflation). In addition, the federal estate tax rate is only 35%, its lowest rate since 1931.

New Rules Regarding Gift Tax: For gifts made after December 31, 2010, the estate and gift tax exemptions will be reunified with a $5 million federal estate tax exemption, a $5 million gift exemption and a $5 million generation skipping transfer (GST) exemption. Furthermore, for transfers made in 2011 and 2012, the gift tax rate and GST tax rate will be 35%. In contrast, in 2009, the federal estate tax exemption was $3.5 million and the lifetime gift exemption was only $1 million. Similarly, in 2009, the gift tax and GST tax rate were significantly higher. Therefore, the Act provides a unique opportunity for creative transfers of wealth across multiple generations.

Options for 2010 Decedents: For decedents who died in 2010, the Act allows those estates the option to either (i) apply the estate tax based on the new $5 million exemption and 35% estate tax maximum rate, with stepped-up basis, or (ii) apply rules under EGTRRA with no estate tax and modified carryover basis rules. Thus, the Executors of estates for decedents who died in 2010 should analyze which option would maximize the transfer of wealth.
Portability: The Act allows for “portability” between spouses of the maximum exclusion after December 31, 2010. Specifically, a surviving spouse is able to elect to take advantage of the unused portion of the federal exemption of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount. However, the deceased spousal exclusion amount would only be available to the surviving spouse if an election was made on a timely filed estate tax return. However, if the surviving spouse is predeceased by more than one spouse, the exclusion amount available would be limited to the lesser of $5 million or the unused exclusion of the last deceased spouse. Furthermore, it is uncertain whether the tax regime for 2013 and beyond will allow for such portability. Clients are still encouraged to utilize traditional estate planning tools to leverage use of each spouse’s federal exemptions.

Illinois Decoupling: Illinois estate tax law has typically followed the Federal law, with some exception. In 2010, when there was no Federal estate tax, there was also no Illinois estate tax (that may not be the case for residents of other states, or people owning property in other states). However, as previously noted, in 2009 the state and Federal exemptions “decoupled” - the Illinois estate tax exemption had been limited to $2 million per person while the Federal exemption was $3.5 million. As a result, absent proper planning, an Illinois estate tax may have been due on the first spouse to die, even if no Federal estate tax was due. With the recently enacted Illinois legislation, the Illinois estate tax reappears but, as was the case in 2009, with only a $2 million exemption (compared to the Federal exemption of $5 million). We have developed a solution to prevent these types of unintended tax consequences by allowing the executor to make a marital deduction election as to a portion of the credit shelter trust for Illinois purposes only. For example, for decedents who die in 2011, the credit shelter trust would be fully funded with $5 million and qualify for the Federal estate tax exemption amount. The executor then made an election as to assets worth $3 million in the credit shelter trust to qualify for the marital deduction only for Illinois purposes. This allows our clients to maximize the Federal and Illinois exemptions without being subject to either Federal or Illinois estate tax on the death of the first spouse. This “decoupling” requires some documents to be updated to allow for special marital trust planning in Illinois and provides an example of how updating your existing documents may result in $352,158 of estate tax savings.

Call to Action
These recently enacted laws and historical perspective provide tremendous insight on the importance for estate planning documents to have the flexibility to weather the storm of the changing tax regimes. It is critical that you have your documents reviewed to ensure they contain these tools. Similarly, other circumstances may warrant updating your documents – birth of children, grandchildren, marriage, divorce, asset protection concerns for beneficiaries, acquisition of additional assets, or new philanthropic intentions.

I would be happy to review your existing documents in light of the new laws and changes in circumstances. Please contact me to make certain your estate plan accurately reflects your testamentary intentions and incorporates the necessary tools to maximize the transfer of wealth.

On Friday, December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) into law. For 2011 and 2012, the Act effectively reinstated the estate and generation-skipping transfer (“GST”) taxes and fixed the exemption amount at $5 million per person with a maximum estate tax rate of 35%.

However, while the Federal estate tax exemption will be $5 million, Illinois lawmakers have other plans. SB2505 proposes the state of Illinois “decouple” from the Federal estate tax exemption and fix the state level exemption at $2 million.

While for many clients working to accumulate wealth, $2 million may sound like a large amount, keep in mind that the value includes all assets you own – including proceeds from life insurance policies owned in your individual name. Therefore, the $2 million term life insurance policy you just purchased may have a $0 cash value during your lifetime, but IS included in your gross estate. Under the new legislation, that policy alone will easily push your estate tax to be “taxable” at the state level.

Under current law, Illinois residents must pay both a Federal estate tax and a separate Illinois estate tax. Traditionally, not much attention was paid to the Illinois estate tax because any estate tax paid to the state of Illinois was subtracted from any Federal estate tax due. In addition, Illinois estate tax exemptions were “coupled” with Federal estate tax exemptions. For example, in 2008 when the Federal estate tax exemption was $2 million, the Illinois estate tax exemption was also $2 million.

In 2009, the Federal estate tax exemption was increased to $3.5 million. However, the Illinois estate tax exemption for 2009 was fixed at $2 million. As a result, for many Illinois decedents, this “decoupling” (divergence of the Illinois estate tax exemption and the Federal estate tax exemption) resulted in $209,124 of Illinois estate tax. It now appears that the Illinois estate tax exemption will again decouple from the Federal level.

We have developed a solution to prevent these unintended tax consequences by allowing the executor to make a marital deduction election as to a portion of the credit shelter trust for Illinois purposes only. Assuming the governor signs the pending bill into law, the credit shelter trust would be fully funded with $5,000,000 and qualify for the Federal estate tax exemption amount. The executor would then make an election as to assets worth $3,000,000 in the credit shelter trust to qualify for the marital deduction only for Illinois purposes. This would allow you to maximize the Federal and Illinois exemptions without being subject to either Federal or Illinois estate tax on the death of the first spouse.

This legislation serves as a reminder of the importance of proper planning and the need to have your existing estate planning documents reviewed.

Lindsey Markus’ first client AND mom will be speaking at the Professional Women’s Club of Chicago Networking Luncheon on Wednesday, October 13th at the Union League Club of Chicago. Registration for the event begins at 11:30 am and lunch will be from 11:45 am – 1:30 pm.

Dr. Donalee Markus and her “Designs for Strong Minds” associates have been innovators in the critical thinking field, maximizing intelligence for individuals and corporations throughout the US. Her unique exercises uses game-like, content free exercises to filter out emotional influences allowing participants to focus primarily on their skills. During her presentation for the PWCC, Dr. Markus will teach participants how to hold more information, sort and organize information in innovative ways, and collect information from a broader base. These skills then help individuals:
• Enhance their communication skills
• Increase their flexibility and risk taking
• Improve their analytical ability
• Optimize their creativity
• Reduce stress

The Designs for Strong Minds program can be geared towards children, adolescents, professionals, and aging adults. Dr. Markus has been especially successful aiding people who have suffered traumatic head injuries and has even designed a program for NASA. For more information on Dr. Markus and the Designs for Strong Minds program, please visit Designs for Strong Minds.

If you are interested in attending the luncheon to participate in Dr. Markus’ fascinating presentation, please click here to register. The cost is $40 for members, and $55 for non-members.

**Coming soon - Strong Mind Puzzles - iPhone Application and Game by Dr. Donalee Markus**

his weekend, October 2^nd and 3^rd, I will be speaking at OPM Education’s annual Fall Business of Medicine Consortium at Northwestern’s Kellogg School of Management. These live courses provide interactive and multi-media platforms that allow residents and physicians to learn vital information about starting their own practices. Individuals from multiple fields, including accounting, banking, and technology, will share best practice methods and experiences regarding the business of medicine to increase the knowledge and practice viability for these young physicians.

My presentation, “The Keys to Personal Finance & Wealth Management - What Every Resident & Physician Should Know About Estate Planning and Asset Protection“, will provide residents and physicians with vital information about planning for their future that will protect not only their practice, but their personal wealth as well. The consortium is from 8 am – 7:30 pm on Saturday and 8 am – 4:30 pm on Sunday in Weiboldt Hall of Northwestern’s Kellogg School of Management. Please visit http://www.opmeducation.org/events/ for more information.

Click the link below to listen to the PERL Mortgage podcast on estate planning featuring PERL Mortgage Advisor, Alex Margulis, and me. Alex and I discuss such hot topics as the benefit of having a living trust over having just a will, how to find out which form of holding title is right for you, and how depressed asset values make it prime time to transfer wealth. We also address the myth that trusts are only for wealthy individuals, explaining why anyone with over $100,000 in assets (from the equity in your home to the cash value of a life insurance policy) should consider a trust to avoid probate, minimize taxes, and provide asset protection. NOW is the best time to review your finances and meet with an estate planning attorney to plan for your future! And, with interest rates at an all time low, now is a great time to consider refinancing your real estate property.

Listen and learn - Download Podcast (mp3 format)

Please join us for “Investing with 2020 Vision:
Creating your personal wealth management strategy for the next decade and beyond”!

Gain a deeper understanding of the main themes and drivers currently active in the global market place and learn how they apply to you and your personal investment strategy. Panelists, who are leaders in the industry, will lead and then engage the audience in a high level of intelligent and thoughtful discussions on these relevant topics.

I have the pleasure of participating in the panel on Estate Planning. Please join me for this wonderful event!

For more information, please see: http://static.85broads.com/broadcasts/Chicago_Chapter_INvesting_with_2020_Vision.html

And, make sure you register in advance by emailing: Chicago85Broads@gmail.com

The terms of The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided for a lapse in the federal estate tax for the 2010 calendar year. In other words, under the current regime, individuals who die in 2010 can pass an unlimited amount of assets to named beneficiaries.

Many assumed Congress would enact a permanent revision to the federal estate tax, however no such law has been passed. The House of Representatives and Senate continue to argue over the specifics of the law, in addition to several other critical issues which are taking priority. Therefore, it is crucial for estate plan documents to take current laws into consideration.
At first blush, the ability to pass an unlimited amount of assets sounds great. However, as is often the case with legislation, taxpayers would be well advised to read the fine print first!

Critical issues associated with the 2010 Estate Tax Regime may include the following:
• NO ASSETS will to pass to your surviving spouse
• Significant INCOME TAX consequences
• Bequests to grandchildren may be DISREGARDED

These issues are very complex and must be examined in the context of your personal asset portfolio and your existing estate plan. The purpose of the summary below is to high light some of the most critical issues associated with the 2010 Estate Tax Regime. However, don’t worry – these issues can be addressed by reviewing and updating existing estate plan.

Do you intend for NOTHING to pass to your surviving spouse?

For a married couple, assets are typically divided into two separate trusts upon the death of the first spouse. Traditionally, the “Family Trust” (or Residuary Trust) is funded with the federal estate tax exemption (the maximum amount that would pass estate tax free). In 2009, for example, the federal estate tax exemption was $3,500,000. Therefore, for individuals who died in 2009, the Family Trust was funded with $3,500,000. Any assets in excess of the exemption were used to fund the “Marital Trust” (which is solely for the benefit of the surviving spouse during her lifetime).

However, in 2010 the exemption is unlimited. Therefore, the “maximum amount that would pass estate tax free” would be the entire estate, and the Marital Trust would never be funded. That is not necessarily problematic, UNLESS the trust terms of the trust do not allow the surviving spouse access to the Family Trust. Some trust documents provide that the surviving spouse is only a beneficiary of the Marital Trust (and not the Family Trust). As such, under the current regime the surviving spouse may be disinherited.

Furthermore, regardless of whether the surviving spouse is a beneficiary of the Family Trust, failure to fund a Marital Trust can create unintentional income tax consequences associated with basis (see “Basis Shmasis” below).

Basis Shmasis!

Basis is an important aspect of income tax. Essentially, basis is the “cost” of a particular asset against which taxable gain is calculated. With regard to bequests/gifts made pursuant to an estate plan, Internal Revenue Code Section 1022 provides that for years PRIOR to 2010, upon death, assets passing to beneficiaries get a “step-up” in basis. For example, if Uncle Jerry purchased a home in 1970 for $100,000 that was now valued at $1,000,000, upon Uncle Jerry’s death in 2009, the beneficiaries would get a “step-up” in basis to the $1,000,000 fair market value. Subsequently, upon selling Uncle Jerry’s home, the beneficiaries would realize no gain on sale for income tax purposes.

Under the current 2010 regime, for individuals dying in 2010, beneficiaries are required to take the decedent’s “carry-over basis”, subject to certain exceptions. Thus, Uncle Jerry’s $100,000 basis would “carry-over” to the beneficiaries, and if the property was sold for $1,000,000, they would recognize tax on the $900,000 gain.

To complicate matters, there are two exceptions to the carryover basis provisions:
1. The executor can allocate up to $1,300,000 (increased by unused losses and loss carryovers) to increase the basis of assets; and
2. The executor can also allocate up to $3,000,000 million to increase the basis of assets passing to a surviving spouse.

However, in true legislative-style, there are exceptions to the exceptions!

First, these allocations may not increase the basis of an asset above its fair market value as of the decedent’s date of death. Second, in order for assets passing to the surviving spouse to qualify, the decedent must have provided that the assets go to the spouse either outright or in a Qualified Terminable Interest Property (QTIP) trust (i.e., a special trust solely for the benefit of the surviving spouse during her lifetime, such as a Marital Trust). Thus, if no Marital Trust was created (discussed above), even if the surviving spouse was a beneficiary of the Family Trust, assets allocated to her from this trust would not be eligible for the $3,000,000 basis increase.

Generation Skipping Transfer Tax – Skips Right Out of the Picture!

The generation skipping transfer tax (“GST Tax”) refers to the tax imposed on outright gifts and transfers in trust to beneficiaries who are a “skip person” (i.e., gifts or transfers to related persons more than one generation away from the decedent; for example, money that passes to an individual’s grandchildren, skipping his/her children). The EGTRRA also provided for the GST Tax to disappear in 2010.

The issue is, some documents may provide a gift to grandchildren where the amount is calculated based solely on the GST Tax Exemption. However, such language may be interpreted so that NOTHING passes to the intended beneficiary!

The Magic Eight Ball Dilemma – “Not Sure, Ask Again Later”

Congress has intimated several different and even conflicting courses of action, none of which are guaranteed to come to fruition in the near future. If Congress fails to take ANY action, EGTRRA provides that starting in 2011, the federal estate tax exemption amount plummets to $1,000,000, and the maximum estate tax rate increases to 60%. This would dramatically increase the number of estates subject to estate tax and the amount of tax due.

Another idea set forth is that Congress may pass legislation to “freeze” the 2009 estate tax regime. This would mean the exemption level would be set at $3,500,000 with a maximum federal estate tax rate of 45%. An additional issue is whether such legislation would be in effect on a going forward basis, or whether Congress would call for such legislation to be retroactive with an effective date of January 1, 2010. If the latter, then none of the 2010 issues would apply. However, the constitutionality of retroactive legislation is questionable.

Yet another option is for Congress to enact an entirely new estate tax regime, either on a going forward basis or retroactively.

Bottom Line

Have your existing documents reviewed to ensure they provide flexibility to deal with the uncertainties of 2010 and beyond.

There was a great article in last week’s Wall Street Journal on State Death Taxes (http://online.wsj.com/article/SB125694593227919879.html)

For those of you who may have missed my prior posts on this subject, please check out my September 10th blog to learn how the state of Illinois’ death taxes may cost you and your family $209,124!  And, tell the WSJ you read it at www.LindseyMarkus.com first!