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April 21, 2009 Articles Trusts & Estates

It seems that the only thing you can be sure of these days is that “unprecedented” will be used to describe something you are experiencing. Stock market fluctuations are unprecedented…the real estate cycle is unprecedented…the Troubled Asset Relief Program is unprecedented…the labor market is unprecedented…the use of the word “unprecedented” is…well…unprecedented.

One precedent upon which you can rely is that you must review your estate plan when there is a significant change in your life. Unfortunately, for most of us, the unprecedented state of the economy is such a significant change. Many estates have assets with currently depressed market values. A bright spot is that the applicable exclusion amount against federal estate tax increased on January 1, 2009, from $2,000,000 to an unprecedented $3,500,000. Larger exemptions and fewer assets provide fertile ground for both unintended consequences and planning opportunities. So, find your Wills and Trusts, brew a pot of good coffee, and read those documents…carefully. Are the provisions outdated? Do they still make sense? Does the math still work?

The Plan with Unintended Consequences. Consider the following estate plan. Assumed Jim created an estate plan in 2007 for his estate then valued at $10,000,000. Upon Jim’s death, $100,000 will be distributed to each of 10 charities, and $100,000 will be distributed to each of Jim’s 5 children. The remaining assets of Jim’s estate will be divided to create a Residuary Trust and Marital Trust. The Residuary Trust is funded with the balance of Jim’s applicable exclusion amount in year of death and the Marital Trust is funded with his remaining assets. Sally will receive the net income of the Marital Trust and the Residuary Trust. The principal of only the Marital Trust is available as needed for Sally’s health, maintenance, and support. She receives no principal from the Residuary Trust. Upon Sally’s death, the remaining assets of both Trusts will be distributed to Jim’s 5 children.

In 2009, Jim’s estate has declined by 35% to $6,500,000. A comparison of the results of his plan in 2007 and 2009 are as follows:

  2007 Estate of $10,000,000 Percentage of 2007 Estate 2009 Estate of $6,500,000 Percentage of 2009 Estate
Charitable Bequests $1,000,000 10% $1,000,000 15%
Cash to Children 500,000 5% 500,000 8%
Residuary Trust 1,500,000 15% 3,000,000 46%
Marital Trust 7,000,000 70% 2,000,000 31%


In 2007 when this plan was crafted, Sally was to receive net income from 85% of Jim’s estate (net income from $8,500,000) and 70% ($7,000,000) of the principal was available for her health, maintenance and support. In 2009 when Jim dies, Sally receives the net income of 77% of Jim’s depressed estate (net income from $5,000,000) and only 31% ($2,000,000) of the depressed principal is available for her health, maintenance and support. 2009 brings a very different picture of available resources for Sally.

Jim reviews his estate plan and becomes concerned about Sally’s well-being after his death. He wants to make some changes. He could change the Residuary Trust to provide Sally with principal for her health, maintenance and support. Perhaps he changes the charitable bequests to delay payment until after Sally’s death. Changing the timing of the charitable bequests would ensure that more assets are available in the Marital Trust for the production of income during Sally’s remaining lifetime and provide more principal to assist with her needs. Perhaps Jim creates a “total return trust” to provide Sally with a fixed percentage of the trust assets every year, even if more than the net income produced, to ensure that she has a more predictable budget each year. Perhaps Jim creates a charitable remainder trust of which Sally is the lifetime beneficiary. There are a many planning alternatives. Jim’s only obligation is to review his plan and to discuss alternatives with his estate planning counsel.

The Unprecedented Year of Opportunity. 2009 may offer more opportunities to transfer wealth with lower transfer tax costs than ever before. These opportunities are found in both simple and complex transactions that take advantage of low current fair market values of assets and low-interest rates.

For example, the annual gift tax exclusion amount increased in 2009 to $13,000 per person per year. If you have assets that have depressed current market values, but potential for growth, you can transfer “more” assets to any individual within this increased exclusion amount.

More complex transfers of assets include Grantor Retained Annuity Trusts (“GRAT”) or Intentionally Defective Grantor Trusts (“IDGT”). Yes, I really meant to say “intentionally defective.” Both types of trusts require careful drafting and administration, but if properly implemented can be exceptional tools to transfer assets anticipated to appreciate in value to the trust beneficiaries at reduced tax costs to you. The benefit of these trusts is amplified during these unprecedented times when asset values and applicable interest rates are low.

Now, let’s not forget to do good for the communities that we love and enjoy. Congress voted to retroactively extend the IRA Charitable Rollover provision through December 31, 2009. If you are 70½ or older, you can contribute up to $100,000 from your IRA directly to a qualified public charity. If properly done, that contribution will count toward your required minimum IRA distribution and you will not be required to include that contribution in your current taxable income. In addition, you receive the estate tax benefit of reducing your overall estate.

There are other significant charitable opportunities that are enhanced by current market conditions. For instance, a Charitable Lead Trust is a trust meant to provide a current stream of income to a charity for a defined period of years, with the remainder interest passing to individuals upon the expiration of the term. If properly drafted and administered, the Charitable Lead Trust should realize both charitable and tax benefits to you and your estate.

If properly implemented, many estate planning techniques can provide positive federal tax benefits to you and your estate. There are many opportunities to transfer wealth to your family, friends or communities that both capitalize on the low asset value environment and are tax-efficient. However, it is critical that you discuss any tax planning ideas with your advisors and professionals. There are exceptions to every rule and qualification requirements to every plan. So, dust off your Wills and Trusts read them (out loud with passion), and discuss with your professional advisors how …yes, one more time…the unprecedented nature of 2009 will impact your estate plan.

For more information regarding this article, you may contact Rose-Anne Frano at 941-536-2033 or at