Topics: |
Will
We Have New Federal Legislation? What Will It Be? |
| BY
POPULAR DEMAND Our Expanded "Checklist" for Estate Planning
Techniques |
| Which
You Should Consider, and Maintenance Reminders |
| New
Alaska Estate Planning Legislation |
Author: |
David
G. Shaftel |
| 2000
© All Rights Reserved |
| A Summary Provided by the: Law Offices of David G. Shaftel,
PC |
WILL
WE HAVE NEW FEDERAL LEGISLATION? WHAT WILL IT BE?
The
Republicans Proposal: Estate Tax Repeal. This bill, H.R.
8, was passed by Congress but vetoed by President Clinton.
It is important to understand exactly what this proposal would
accomplish. Under this bill, the Federal Estate, Gift, and
Generation-Skipping Transfer Taxes would be repealed in the
year 2010. Prior to that time, estate and gift tax rates would
be reduced as follows:
Year |
Top
Rate |
2001 |
53.0% |
2002 |
50.0% |
2003 |
49.0% |
2004 |
48.0% |
2005 |
47.0% |
2006 |
46.0% |
2007 |
44.5% |
2008 |
42.5% |
2009 |
40.5% |
The generation-skipping
transfer tax rate would be equal to the highest estate and
gift tax rate in effect for a given year. Beginning in 2001,
the "unified credit" would be replaced with a unified exemption
amount as follows:
Year |
Amount |
2001 |
$ 675,000 |
2002 |
$ 700,000 |
2003 |
$ 700,000 |
2004 |
$ 850,000 |
2005 |
$ 950,000 |
2006 |
$1,000,000 |
| The
taxpayer "downside" of this proposed repeal is the loss
of a significant income tax benefit. To make up for some
of the loss of revenue, starting in 2010 there would no
longer be an unlimited adjustment of basis to fair market
value for assets owned by a decedent. This adjustment
in basis presently minimizes capital gain taxes when a
surviving spouse sells inherited assets. Starting in 2010,
that adjustment to basis would be limited to: |
|
$1,300,000 of transfers of a decedent to any beneficiaries;
and |
|
An
additional $3,000,000 of transfers from a decedent to
a surviving spouse. |
The personal representative would select which assets
receive the adjustment in basis.
Under H.R. 8, prior to the proposed repeal of the transfer
taxes, a number of advantageous generation-skipping
transfer tax provisions would be enacted to facilitate
the allocation of GST exemption amounts. Finally, H.R.
8 would expand the availability of qualified conservation
easements.
The
September 2000 Compromise Bill Proposed By A Group of
Democrats. This recent proposal was submitted by
the Democrats who had joined the Republicans in voting
for H.R. 8. Under this general proposal, the following
changes to the Federal Estate, Gift, and Generation-Skipping
Taxes would be made: |
|
The
unified credit exemption would be immediately doubled
and would gradually increase to $4,000,000 per couple. |
|
The
top gift and estate tax rates would be immediately reduced
to approximately 45%, and eventually would be reduced
to 39.6%. |
|
The
requirements for qualification for the family-owned business
interest deduction would be simplified. |
Pending Pension Proposals. At the time of the writing
of this newsletter, the House has passed and the Senate
is considering pension bills which include the following
provisions: |
|
Increase
the contribution limit for defined contribution plans,
such as 401(k) plans, to $15,000 by 2005. |
|
Raise
the limit on an employer's deduction for contributions
to defined contribution plans to 20% of compensation. |
|
Make different types of defined contribution plans more
interchangeable and portable. |
|
Modernize pension laws to encourage small businesses to
offer pension plans. |
|
Allow
a qualified charitable distribution from an IRA, which
is made after age 70 ½, which qualifies as a charitable
contribution if made directly to a charitable organization,
a charitable remainder annuity trust, charitable remainder
unitrust, pooled income fund, or charitable gift annuity. |
|
Create a tax credit for small employer plan contributions
and start-up costs. This credit is designed to help offset
the first three years of costs involved in starting a
small business retirement plan. |
|
Rename
as a "Roth 401(k)" a new retirement tool that would allow
workers to contribute after-tax dollars to a 401(k) and
withdraw funds upon retirement tax-free. |
|
Increase income limits for contributions to Roth IRAs
for joint filers to twice the limits for single filers. |
|
Increase the income limit for conversion of an IRA to
a Roth IRA to $200,000 for joint filers. |
What Will Be Enacted and When Will It Occur? At the
date of the writing of this newsletter, the result of
the Presidential election is still up in the air. The
Senate will very probably be Republican by one vote. The
House is 222 Republicans to 211 Democrats. However the
election is resolved, commentators are seriously questioning
whether the new Congress and Administration will be able
to work together in order to accomplish any substantial
legislative changes. Some commentators predict that "gridlock"
will continue. Others speculate that any new legislation
will represent significant compromises between the present
positions of the Republicans and the Democrats. |
NEW ALASKA
|
ESTATE
PLANNING LEGISLATION |
| |
| The
Alaska Legislature enacted a number of important estate
planning bills during the 2000 legislative session. These
include a new Alaska Qualified State Tuition Program as
well as the strengthening of Alaska estate planning laws
in a number of areas. Our firm was active in the process
of proposing and supporting this new state legislation.
These new Alaska laws are as follows: |
| A
Qualified State Tuition Program With Special Asset Protection. Alaska has joined more than 32 other states which
have enacted qualified state tuition programs. Alaska's
plan is available to residents and nonresidents alike,
and adds special asset protection features, discussed
below. |
| Qualified
state tuition programs are authorized by I.R.C. §529.
A participant will contribute cash to the plan for the
benefit of a member of the participant's family. For purposes
of the annual exclusion (presently $10,000), a participant
may elect to take the contribution into account ratably
over a five-year period. Therefore, a participant may
make a current $50,000 contribution, and in effect use
the participant's current and next four years annual exclusion
amounts. Many programs have a maximum contribution limit
which appears to be keyed to an approximation of tuition
and expenses for an undergraduate education. |
| The
participant's contributions to the program are free from
Federal Gift Tax and Generation-Skipping Transfer Tax.
Further, if the participant lives for five years, none
of the contributed assets will be included in the participant's
gross estate for Federal Estate Tax purposes. During the
time that the funds are in the contributed account, they
grow free of income tax. At the appropriate time, amounts
from the account will be distributed to the beneficiary
for tuition and education expenses. The income portion
of these distributions is taxed to the beneficiary pursuant
to I.R.C. §72(b). Proposed federal legislation would eliminate
this income taxation entirely. |
| The
participant may change the beneficiary to another family
member at any time, without penalty. The participant does
retain the ability to withdraw the funds placed in the
account, but the earnings portion of the withdrawn funds
will be taxed at the participant's tax rates and will
be subject to a penalty of at least 10% of the earnings.
Most plans allow the beneficiaries to attend any educational
institution. Contributions to a plan must be in cash.
Most states contract with investment advisors for management
of the contributed funds. The participant may select among
various investment options, but will not have any control
over actual investment of the funds. |
| A
qualified state tuition program is an attractive estate
planning arrangement. The donor-participant may remove
the contributed funds from his or her gross estate, yet
retain the ability to choose the beneficiary among family
members. Unlike funds contributed to a child's or grandchild's
trust, funds contributed to the plan grow free of income.
Annual exclusion contributions for the next five years
may be made during the current year. When distributions
are made to the student-beneficiary, they are taxed at
the beneficiary's rates (or maybe not at all if proposed
legislation is passed). |
| Alaska
has added asset protection to the above-described benefits.
An account is exempt from a claim by the creditors of
the donor or of a beneficiary, and is conclusively presumed
to be a spendthrift trust. The statute further states
that the account is "not an asset or property" of either
the donor or the beneficiary, and may not be assigned,
pledged, or otherwise used to secure a loan or other advancement.
The account is not subject to involuntary transfer or
alienation. |
| The
Board of Regents of the University of Alaska is given
the authority to administer the plan. The Board will select
and contract with an investment manager, establish limitations
relating to maximum and annual contributions, the penalty
for a non-qualified withdrawal, and similar plan matters.
The program is expected to begin in Spring, 2001. |
| Stronger
Asset Protection for Family Limited Partnerships and Limited
Liability Companies. If a creditor obtains a judgment
against a partner or LLC member, most state statutes provide
that the creditor can obtain a "charging order" against
the debtor's partnership or limited liability company
interest. This allows the creditor to receive the distributions
to which the partner or member would be entitled. |
| Generally,
these statutes do not expressly permit other creditor
remedies. This is consistent with the concept that the
other partners of a partnership or members of an LLC should
not have their business or investment activity disrupted
by being forced to take in a substitute partner or member
(e.g., the judgment creditor). This was the generally
understood position taken by the Uniform Limited Partnership
Act and many limited liability acts. |
| However,
in Madison Hills Ltd. v. Madison Hills, Inc., a
Connecticut court has held that a judgment creditor of
a limited partnership could foreclose on the partnership
interest. The Connecticut court's holding opened the door
for courts to provide a variety of remedies to creditors
of partners in limited partnerships and members in LLCs.
These additional remedies could result in forced dissolutions
of the entities and the sale of the assets. The Alaska
Legislature concluded that such results could be very
harmful to the other partners or members, their families,
and their business interests. |
| The
enacted amendments make it clear that a judgment creditor
of an Alaska limited partnership or LLC has only the remedy
of a charging order. Thus, the creditor will receive all
distributions made to the debtor partner or member. But
the right to receive such distributions is the judgment
creditor's sole remedy. No other remedies are available
to the creditor or to a court implementing a creditor's
collection request. |
| This
strengthened creditor protection provided to these entities
by these new amendments should make family limited partnerships
and family limited liability companies even more attractive
for estate planning purposes. While many families utilize
these entities for gift and estate tax reduction, creditor
protection may prove to be an equally advantageous reason
for their use. |
| Trust
Notification and Accounting Rules. The general rules
in Alaska are that within 30 days of acceptance of a trust,
the trustee must inform all the current beneficiaries
of the existence of the trust, and upon request, furnish
them with an annual accounting. New legislation now allows
a settlor (the person who created the trust) to exempt
the trustee from these duties. This exemption may not
continue beyond the settlor's lifetime or a judicial determination
of the settlor's incapacity. |
| Flexible
Methods for Modifying and Terminating Irrevocable Trusts. The Alaska legislature has enacted flexible methods for
the modification and termination of irrevocable trusts.
A trustee, settlor, or beneficiary may initiate proceedings
to modify or terminate a trust if, because of circumstances
not anticipated by the settlor, modification or termination
would substantially further the settlor's purposes in
creating the trust. A court may also construe or modify
the terms of a trust in order to achieve the settlor's
tax objectives. The legislation further provides that
despite the settlor's purposes in creating the trust,
the trust can nonetheless be modified by the court upon
consent of all beneficiaries if the reasons for modifying
or terminating the trust outweigh the interest in accomplishing
the material purposes of the trust. The inclusion of a
spendthrift clause may constitute a material purpose,
but is not presumed to be so. |
| This
modification provision allows for the possibility of modification
due to the changed circumstances of the beneficiaries,
despite what might have been a material intention of the
settlor in establishing the trust. This new statute has
particular relevancy for perpetual trusts because it provides
a technique for future changes of a dispositive plan.
Accordingly, this modification authority helps alleviate
concern about a settlor's "dead hand" control of the trust. |
| Community
Property Agreements and Trusts Strengthened. These
amendments clarify ambiguities regarding the right of
spouses to amend and revoke community property agreements
and trusts. Under the new legislation, a community property
agreement or trust may be amended or revoked at any time
if the instrument generally authorizes amendment or revocation
by the spouses. |
| Clarification
of Rules Allowing for Perpetual Trusts. At least 17
states have either eliminated the rule against perpetuities
or have pending legislation that will do so. A primary
impetus for such elimination is to allow trusts to be
perpetual so that transfer taxes can be minimized as assets
are transferred in trust from generation to generation.
In this process of eliminating the rule against perpetuities,
practioners have become concerned about falling into the
"Delaware Tax Trap." |
| This
"Trap" is created by an Internal Revenue Code provision
which was originally designed to respond to legislation
enacted by Delaware approximately 50 years ago. Alaska
has now enacted clarifying language so that perpetual
trusts created in this state will not fall within this
"Trap." |
| "Safety
Net" Estate Planning Legislation. All too frequently,
estate planning documents fail to contain all the provisions
necessary to maximize available federal gift, estate and
generation-skipping tax benefits. The documents may have
been drafted long ago, and not appropriately updated.
Alternatively, the drafter may have omitted necessary
tax provisions. |
| To
partially cure this problem, Alaska has enacted a "Safety
Net" bill. This legislation supplements wills and trusts
in the following areas: marital deduction trusts, funding,
the family?owned business deduction, restriction of powers
of a trustee?beneficiary, interest rate for pecuniary
devises, conveyances of real property to and from trusts,
and applicability to revocable trusts as well as to wills. |
| Future
Alaska Legislation. Our office is working with local
estate planners to review and propose additional Alaska
estate planning statutes. This proposed legislation will
be submitted to the 2000-2001 Alaska Legislature for its
consideration. Our goal is to continue to improve Alaska
law. We would like Alaska to have the best state laws
for the accomplishment of a family's estate planning. |
|
| Accompanying
this newsletter is our expanded "checklist" for estate
planning techniques which you should consider, and various
maintenance reminders. We have drafted this as a self-contained
checklist which you may retain for periodic reference.
We have listed a variety of modern techniques which may
be used to reduce taxes, provide asset protection, and
enable proper management of your assets for the benefit
of your heirs. We have also listed "maintenance" reminders.
These are various implementation matters which need to
be completed if you want your estate planning to work
effectively. |
| We
hope the above information is helpful to you. We remain
available to help you maintain your estate plan and to
add appropriate new techniques when you so desire. If
you would like to meet with one of our staff to discuss
any of the above subjects, please call. |
| Our
Attorneys: |
| David
G. Shaftel, J.D., LL.M. (Taxation)†± |
| Caroline
P. Wanamaker, J.D.†‡ |
| Donna
Marie, J.D. †± |
| Michael
D. Shaffer, J.D.†µ |
| Bhree
Roumagoux, J.D.† |
| Our Legal Assistants: |
| Leanna
D. Dreher, J.D.± |
| Linda
J. Durr, PLS |
| † Admitted in AK ‡ Admitted in WA |
| ± Admitted in CA µ Admitted
in MA |
|
