IRS Issues Guidance on Investment Advisory Costs Subject to 2% Floor Under I.R.C. Sec. 67(a)

On April 13, 2011, the Internal Revenue Service issued Notice 2011-37, providing interim guidance on the treatment of investment advisory and other costs subject to the 2% floor under I.R.C. Sec. 67(a). For taxable years beginning before the date final regulations on the issue are published, nongrantor trusts and estates will not be required to “unbundle” a fiduciary fee into portions consisting of costs that are fully deductible and costs that are subject to the 2% floor.

Notice 2011-37 is scheduled to be published in Internal Revenue Bulletin 2011-20 on May 16, 2011.

IRS Releases 2010 Form 709 & Instructions

On March 15, 2011, the IRS released the Form 709 with respect to gifts made during calendar year 2010, and the accompanying Instructions. 

The 2010 Form 709 may be found here.

The Instructions for the 2010 Form 709 may be found here.

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March 17, 2011 Update:  The IRS has temporarily removed the 2010 Form 709 and related instructions to correct an error.  It is anticipated that revised documents will be posted soon.

New Massachusetts Homestead Act, Effective March 16, 2011

Author:
Robert H. Ryan, Esq., Bove & Langa, P.C.

On December 16, 2010, Governor Patrick signed Senate Bill 2406, AN ACT RELATIVE TO THE ESTATE OF HOMESTEAD (hereinafter referred to as the “Act”),[1] which is a complete revision of the Massachusetts homestead law. Although the statute will still be known as M.G.L. c. 188, the substantive provisions are much improved and, for the most part, clearer. This summary is intended to provide highlights to probate and trust and estate practitioners so that they may become familiar with changes that will become effective on March 16, 2011 (per Massachusetts legislative rules, laws generally become effective 90 days after the Governor signs the law).

There has been considerable discussion regarding homestead protection during the past few years by many practitioners and several articles have appeared in Massachusetts legal publications highlighting problems with the law. Many of these problems have been addressed by the Act.

Impact of Trust Ownership of Principal Residence on Homestead Declaration Under the Old Law

In a typical estate plan involving the use of trusts, the transfer of title of a principal residence is often done without proper consideration given to the issue of homestead protection. For several years, some practitioners have believed that a properly recorded homestead declaration on a principal residence could be preserved by reserving the homestead when a transfer of the principal residence was made to a trust. The authority generally cited for this position was c. 188 §7, where reference is made to termination of a homestead “by a deed conveying the property in which an estate of homestead exists, signed by the owner and the owner’s spouse, if any, which does not specifically reserve said estate of homestead {emphasis added}.” Accordingly, some practitioners believed that by specifically reserving a homestead when conveying the principal residence to a trust, the principal residence held in the trust would be protected by a homestead declaration.

However, it is understood that the Land Court has strictly relied on the ruling in Bristol County v. Spinelli [2] that a homestead cannot apply to registered land held in trust. Therefore, there has been a question as to whether the Land Court would recognize the reservation of a homestead declaration for a conveyance of registered land to a trust. Since Spinelli did not address recorded land, some practitioners have also believed that a homestead declaration might be effective for recorded land conveyed to a trust.

Who is Protected by a Homestead Declaration Under the Old Law?

A further issue of concern has been the determination of who benefits from the protection afforded by a homestead declaration. It is interesting to note that the old law clearly states that a c. 188 §1 declaration applies to a “family” as defined in the statute, which includes the declarant’s children and spouse. For c. 188 §1 purposes, the statute applies even if a child is an adult. However, c. 188 §4 provides for the continuation of the homestead upon the death of the declarant. But in that instance, c. 188 §4 refers to the “minor” children of the declarant, raising a valid question as to whether a new homestead must be declared by the surviving non-declarant spouse in order to provide protection to an “adult” child who is a member of the family.

If a couple owns a property as tenants-in-common, joint-tenants, tenants-by-the-entirety, or life tenants, the statute prior to the revision is clear that they are a family and a family can only record one c. 188 §1 homestead. Therefore, there is often a question as to which spouse should record the declaration of homestead. Generally, if the declarant spouse dies, the surviving spouse is protected. However, a c. 188 §1A elder and disabled homestead only applies to the owner who declared it and the homestead protection terminates at the same moment the c. 188 §1A declarant dies.

Furthermore, at times there has been confusion in some of the Registries of Deeds as to whether each non-spouse co-owner of a principal residence may file a homestead declaration. In response to the uncertainty, the Chief Title Examiner for the Land Court issued a memo to the Registries of Deeds, dated August 25, 2006, which confirmed that multiple homestead declarations may be filed by unrelated co-owners.

Questions About the Old Homestead Statute

As suggested by the above overview of key homestead issues, many questions about the old homestead statute have needed to be addressed, such as:

1) Why isn’t the homestead protection automatic?

2) How much equity is protected by the homestead declaration if there is more than one owner?

3) For estate planning purposes, does a homeowner have to choose between taking advantage of trust planning or homestead protection?

4) Is a homestead terminated by transfers within the family or upon the death of the declarant?

5) Are the proceeds from a sale of the principal residence or insurance for a casualty loss to a principal residence protected by a homestead?

6) Does the waiver of homestead in refinancing documents waive the homestead protection against all creditors?

7) Who should file the homestead? Should it be the spouse with greater exposure?

Key Highlights of the New Law Addressing These Questions

Automatic Homestead Protection

In response to concern that many homeowners are not aware of the requirement that a formal filing must be made in order to benefit from the homestead statute, the Act provides for an automatic allocation of homestead protection to a property that is the principal residence of the owner. However, the amount of automatic protection is limited to $125,000 of equity; a homeowner must still file a homestead declaration to benefit from the full $500,000 of equity homestead protection. The automatic homestead will apply to all existing principal residences as of March 16, 2011.

Clarification of Extent of Protection for Multiple Owners

The Act clarifies that although multiple owners of a principal residence may benefit from homestead protection, the aggregate protection (not including the enhanced protection for elder or disabled owners) is limited to the $500,000 homestead amount. However, in the case of a married couple who can BOTH benefit from what is known as an elder and disabled homestead, the aggregate protection for the principal residence may be increased to $1,000,000 of equity. In the case of non-married co-owners of a principal residence (e.g. sibling co-owners) who ALL file for the elderly or disabled homestead, the aggregate protection is the product of $500,000 of equity multiplied by the number of owners who qualify for the elderly or disabled homestead. Depending on the circumstances, the aggregate protection for a property could be $125,000, $500,000, $750,000, $1,000,000, or even greater.

Finally – Homestead Applies to a Principal Residence Titled in Trust

In recognition of the extensive use of trusts to hold title to principal residences, the Act finally extends the benefit of homestead protection to principal residences for which title is held in trust. In order to obtain such protection, the trustee must file a declaration of homestead stating, among other things, the names of the beneficiaries who seek to obtain such homestead protection, and the fact that the property is their principal residence.

All in the Family

The Act provides that the transfer of a principal residence between family members does not terminate an existing homestead, even if the new deed fails to reserve the homestead upon the transfer. In addition, a homestead existing at the death or divorce of a person holding a homestead shall continue for the benefit of his or her surviving spouse or former spouse and minor children who occupy or intend to occupy said home as a principal residence. However, any adult child who has an ownership interest in the principal residence is required to file his or her own homestead declaration to take advantage of the increased protection of $500,000.

Sales and Insurance Proceeds Relating to Homestead Property are Protected

Finally resolving an age-old question, the proceeds from the sale of a principal residence, or the insurance proceeds from a principal residence that suffers a casualty loss, are protected by the homestead in order to purchase a new principal residence or repair a damaged one. The proceeds from a sale are protected for the period of one year from sale of the current principal residence. Insurance proceeds are protected for a two-year period from receipt of the proceeds.

Mortgage Waiver of Homestead is Just That

Another age-old question relates to whether the apparent blanket waiver of a homestead in mortgage documents terminates the protection of a homestead against all creditors. The Act provides the sensible answer that a mortgage does not terminate a previously filed homestead but only subordinates the homestead to the specific mortgage at issue.

Simple Solution to Which Spouse Files the Homestead

To resolve the question of which spouse should file the homestead the Act chooses a simple solution – it requires that both spouses who have an ownership interest in the principal residence sign the declaration of homestead. In addition, the declaration must identify each person receiving homestead protection, including the name of a spouse who may not be an owner. The declaration must also state that each person occupies, or intends to occupy, the property as his or her principal residence.

New Act – New Questions

1) Does an existing estate of homestead in effect March 16, 2011, continue in full force and effect?

• Yes, even if it does not comply with the execution requirements of the Act (e.g., only one spouse named in the deed signed the declaration under the homestead statute before the revisions, whereas the Act now requires both spouses whose names are on the deed to sign the declaration).

2) Do I still need to file a Declaration of Homestead if I intend to file for bankruptcy?

• Yes, if you want to obtain the full exemption amount available under the Act rather than the lower exemption amount available per the automatic homestead protection.

3) Will the Homestead Declaration now apply against pre-existing debts without the need to file for Bankruptcy?

• Yes, and this is a big change in the law.

Massachusetts Issues Guidance and Forms

The Secretary of the Commonwealth has recently published guidance and forms for filing a Declaration of Homestead under the new law.  Each can be found HERE.
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[1] There has been some confusion when looking to read the Act on the State Legislative website. Please note the actual text of the final version of Senate Bill 2406 (186th Session 2009-2010) is set forth at House Bill 4878 (186th Session 2009-2010), pursuant to a House Amendment.  The new Act is set forth at Session Laws, 2010, Chapter 395, AN ACT RELATIVE TO THE ESTATE OF HOMESTEAD.

[2] 38 Mass. App. Ct. 655 (1995).

IRS Releases Draft 2010 Form 709

On March 5, 2011, the IRS posted a draft Form 709 with respect to gifts made during calendar year 2010. The IRS caution preceding the draft suggests a thirty day period for comments. Instructions did not accompany the draft form.

The draft may be found here.

T&E Litigation Update – Gillespie v. Gillespie and Cosgrove v. Hughes

Author:
Mark E. Swirbalus, Esq., Day Pitney LLP

The T&E Litigation Update is a recurring column summarizing recent trusts and estates case law. If you have question about this update or about T&E litigation generally, please feel free to e-mail the author by clicking on his name above.

Gillespie v. Gillespie

In Gillespie v. Gillespie, Case No. 09-P-2174, 2011 Mass. App. Unpub. LEXIS 156 (Feb. 7, 2011), a decision issued pursuant to Rule 1:28, the Appeals Court addressed claims for tortious interference with expectancy of a gift and wrongful death by suicide.

The decedent was survived by his second wife Peggy and his son Vincent. Vincent alleged that Peggy was liable to him for tortiously interfering with his expectancy by “hectoring” the decedent to execute a will largely in her favor, and was liable to the decedent’s estate for wrongful death by forcing him to commit suicide through her cruelty. The superior court granted Peggy’s motion for summary judgment with respect to both claims, and the Appeals Court affirmed.

Judgment as a matter of law was entered on the tortious interference claim because Vincent never contested the decedent’s will. Vincent’s allegations of tortious interference amounted to an undue influence claim, and so this claim should have been raised during the probate of the will. The Court explained that Vincent did not have the choice of either submitting evidence of undue influence in opposition to the probate of the will or consenting to the allowance of the will and then attacking it in a tort action in superior court.

Judgment as a matter of law was entered on the wrongful death claim because, even assuming that Vincent had standing to bring this claim pursuant to G.L. c. 230, § 5, the decedent’s suicide was an independent intervening cause between Peggy’s alleged conduct and the decedent’s death. Although suicide may not be treated as an independent intervening cause if the defendant inflicted an injury that caused an uncontrollable suicidal impulse, or if the decedent was in the defendant’s custody and she had knowledge of the decedent’s suicidal ideation, Vincent offered no such evidence.

Cosgrove v. Hughes

In Cosgrove v. Hughes, Case No. 10-P-338, 2011 Mass. App. LEXIS 211 (Feb. 15, 2011), the Appeals Court dealt with the question of what constitutes “acknowledgement” of paternity under the intestacy statute, G.L. c. 190, § 7. 

The facts of this case are interesting. In a very small nutshell, they are as follows:

The decedent’s intestate estate was substantial. A woman named Verna who claimed to be the decedent’s daughter was appointed as the administratrix, which led to a dispute as to whether Verna is indeed the decedent’s daughter. A number of the decedent’s nieces and nephews sought a declaratory judgment in the probate court that Verna is not the decedent’s daughter, and thus that she is not an heir and may not inherit from his estate. They submitted evidence indicating that the decedent had lived in Massachusetts for most of his life and had never mentioned having a wife or child. Verna submitted competing evidence, including a certificate of marriage, indicating that the decedent was married to Verna’s mother from 1944 until her death in 2006.

Although Verna was born in 1931, some thirteen years prior to her mother’s marriage to the decedent, and although there was contradictory evidence as to whether the decedent regarded her as his daughter, the probate court found that there was sufficient evidence of his acknowledgement of paternity. The Appeals Court affirmed.

The Court’s decision addressed two primary issues: (1) whether Verna must be the decedent’s biological child in order to inherit under the intestacy statute; and (2) what constitutes a valid acknowledgement.

As to the first question, the Court held that the intestacy statute does not necessarily require biological parenthood. For example, under the statute, adopted children are treated no differently than biological children. In making this holding, the Court distinguished the statutory and case law concerning support obligations, custody and visitation, because the issues at stake in those kinds of proceedings are dramatically different than in an intestacy proceeding. Therefore, because biological parenthood is not required, the genuine issues of fact regarding whether Verna is the decedent’s biological child were rendered immaterial.

As to the second question, the Court explained that the only requirement for a valid acknowledgement is that it be unambiguous. “[N]o formal acts are prescribed by the statute which shall constitute the acknowledgement required,” and “such recognition may be shown by conduct as well as declarations. . . .” In light of this standard, the Court held that the decedent had validly acknowledged his paternity in an affidavit he signed in 1944, in which he and Verna’s mother were identified as her “natural parents.” The fact that the decedent thereafter did not consistently assert that Verna was his daughter, even in a sworn listing of his beneficiaries, does not change the effect of the acknowledgement in the 1944 affidavit. Once he acknowledged Verna as his daughter, she was his child and heir, just as if she had been born in wedlock.

Generally regarding the contradictory evidence as to Verna’s relationship to the decedent, the Court noted that this evidence must be viewed against the backdrop of the shame and stigma for both mother and child attendant at the relevant times upon out-of-wedlock birth.

Update on Status of Adopted Issue Statute

Authors:
Brad Bedingfield, Esq., Wilmer Cutler Pickering Hale and Dorr LLP
Matthew R. Hillery, Esq., Edwards Angell Palmer & Dodge LLP
Suma V. Nair, Esq., Goulston & Storrs, P.C.

As a follow up to our August 6, 2010 post (available HERE), on January 21, 2011, Representative Alice Hanlon Peisch introduced An Act to Repeal the Adopted Children’s Act as House Docket No. 02828. A bill number will be assigned once the proposed legislation has been assigned to a committee, and a link to the draft will then be provided on this blog.

As background, Chapter 524 of the Acts of 2008 (the “Adopted Children’s Act”) reversed a longstanding rule of construction governing the treatment of adopted persons in wills, trusts and similar instruments executed before August 26, 1958. Adopted persons (or their issue), who were previously presumed to be excluded as beneficiaries where the instrument did not specify their status, are now presumed to be included, retroactively conferring upon them benefits they never before enjoyed and retroactively diminishing interests held by natural-born descendants.

The Adopted Children’s Act originally was signed by the Governor in January of 2009. Due to multiple concerns relating to the application of this retroactive statute, the Boston Bar Association and other bar associations asked the Legislature to repeal the new act or to delay its original April 15, 2009 effective date. The legislation took effect as scheduled, but in response to these requests, the Legislature included provisions in the 2009 budget that essentially suspended the new rule of construction from July 1, 2009 to June 30, 2010. The rule of construction then came back into effect on July 1, 2010 and has existed ever since. The bar’s further efforts to repeal the new rule permanently have been unsuccessful to date, but the proposed legislation has now been reintroduced in the House.

The Boston Bar Association continues to support the repeal of the rule of construction introduced by Chapter 524.

Information about the IRS’ 2010 Form 8939

Today, the IRS posted additional information about the Form 8939. The final version of the Form will be used to allocate basis for property acquired from a decedent dying in 2010. The IRS notes that instructions will be published once the final version of the Form is available (at least 90 days before the date that the Form is required to be filed).

The IRS advises that Form 8939 should not be filed with the decedent’s final income tax return, and that the election into EGTRRA’s modified carry-over basis rules should not be made on the decedent’s final income tax return. Instructions for how to make the election will be included on the final Form 8939.

More information can be found here.

T&E Litigation Update – Comeau v. Coache and Bruner v. Bruner

Author:
Mark E. Swirbalus, Esq., Day Pitney LLP

The T&E Litigation Update is a recurring column summarizing recent trusts and estates case law. If you have questions about this update or about T&E litigation generally, please feel free to e-mail the author by clicking on his name above.

Comeau v. Coache

In Comeau v. Coache, Case No. 09-P-1984, 2010 Mass. App. Unpub. LEXIS 101 (Jan. 24, 2010), a decision issued pursuant to Rule 1:28, the Appeals Court reversed a judgment of the probate court terminating the plaintiff’s life estate in the trust property.

Plaintiff was granted a life estate in a home in Ipswich held in the Comeau Family Trust. The relevant provision of the trust allows plaintiff to “continue to occupy the dwelling as his principal residence, provided that he pay all real estate taxes, insurance, maintenance and utilities for the premises.” When plaintiff sought an order compelling the remaindermen to reimburse him for their proportional share of the cost of replacing certain windows, which he claimed to be a capital improvement, and for which he had already paid, the remaindermen sought to terminate plaintiff’s life estate, arguing that the replacement of the windows constituted maintenance work for which plaintiff was solely responsible.

The probate court decided in favor of the remaindermen, finding that the window-replacement work constituted maintenance and terminating plaintiff’s right to occupy the property. In reversing this decision, the Appeals Court held that, regardless of whether the replacement of the windows was a capital improvement or maintenance, plaintiff had in fact paid for the work, and his pattern of conduct over the years showed a continuing effort to preserve the integrity and value of the property. The Appeals Court also noted that although plaintiff’s obligation to pay for maintenance work could be interpreted to be a condition subsequent, such conditions are not favored in the law. “[T]here is substantial doubt whether the trust document intended that [plaintiff] automatically forfeit his right to occupy the premises if he breached his duty to pay for maintenance.”

Bruner v. Bruner

In Bruner v. Bruner, Case No. SJC-10653 (Jan. 27, 2011), the Supreme Judicial Court approved the reformation of a trust to conform with the settlor’s intent.

The trust instrument provides that its assets are to be divided between two subtrusts: the “marital trust” for the benefit of the settlor’s surviving spouse, and the “family trust” for the benefit of the remaining named beneficiaries and their issue. Unfortunately, because of a decline in the value of the assets since the settlor’s death, there would have been nothing left for the family trust after the marital trust was funded pursuant to the formula in the trust instrument.

The trustees sought to reform the trust to allow the family trust to be funded first, with the remaining assets allocated to the marital trust. The trustees argued that this modification would be consistent with the settlor’s intent to fund the family trust and to minimize the eventual taxes on her surviving spouse’s estate by reducing the assets allocated to the marital trust. With the assent of all parties and a guardian ad litem, the Court ordered the requested reformation.

Interestingly, after oral argument, the Court asked the trustees to supplement the record with affidavits from the attorney who drafted the trust instrument and from the surviving spouse. These affidavits provided the Court with information regarding the settlor’s estate planning goals that was missing from the record. The Court reminded parties in future cases to furnish “a full and proper record and the requisite degree of proof that they are entitled to the relief they seek.”

Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 – A Summary and Statutory Analysis of Key Estate Planning Provisions

Authors:
Adrienne Penta, Esq., Brown Brothers Harriman
Kerry L. Spindler, Esq., Goulston & Storrs, PC

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (the “TRA”) into law. The TRA extends a number of the Bush tax cuts and benefits under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”), and the Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”), and also introduces additional cuts. Effective for only two years, the TRA is a temporary fix to the uncertainties raised by the sunset of the relevant provisions of these acts (now scheduled to occur after December 31, 2012).

Following is a summary and statutory analysis of the TRA provisions that most affect estate planning.

SELECT ESTATE, GIFT AND GENERATION SKIPPING TAX PROVISIONS

(1) Federal Estate, GST and Gift Tax Exemption Amounts. The TRA increases the individual exemption amounts from federal estate, GST and gift taxes to $5M. The $5M estate and GST tax exemption amounts are retroactive to January 1, 2010 and remain in effect through 2012. The $5M gift tax exemption is effective as of January 1, 2011 and also remains in effect through 2012. As a result, the gift tax exemption amount remains at $1M for 2010, but beginning January 1, 2011, the estate tax, GST tax and gift tax exemption amounts are unified for the first time ever and through 2012. Unification means not only that the taxes share the same rate and exemption amount, but also that an individual may use any portion of his or her $5 million exemption amount to make gifts (including generation skipping gifts) during life. Any amount not used during life will be available at death.

(a) Statutory analysis of federal estate tax exemption amount. EGTRRA § 521(a) amended Internal Revenue Code (the “Code”) § 2010(c) to increase the federal estate tax exemption amount incrementally from $675,000 in 2001 to $3,500,000 in 2009. EGTRRA § 501(a), however, created Code § 2210, repealing the estate tax for decedents dying in 2010. EGTRRA § 901 scheduled this repeal to sunset on December 31, 2010 and directed that the Code thereafter be applied and administered as if EGTRRA “had never been enacted”. The result would have been a federal estate tax exemption amount of $1M beginning on January 1, 2011.

TRA § 302(a) amends Code § 2010(c) to increase the federal estate tax exemption amount to $5M, and TRA § 101 postpones EGTRRA’s sunset until December 31, 2012. Together, these sections eliminate the one-year repeal of the estate tax (see the discussion below regarding an optional election into the repeal and out of the estate tax for deaths occurring in 2010) and establish a $5M estate tax exemption amount from 2010 through 2012 (with a possible inflation adjustment after 2011).

(b) Statutory analysis of federal GST tax exemption amount. Prior to 2004, Code § 2631(c) prescribed a GST exemption amount of $1M. EGTRRA §§ 521(c) and (e)(3) caused the GST exemption amount to track the federal estate tax exemption amount beginning in 2004. Moreover, EGTRRA § 501(b) created Code § 2664, which caused Subtitle B of the Code (containing the GST tax statutes) not to apply to GST transfers occurring after December 31, 2009, thereby repealing the GST tax with respect to 2010 transfers. EGTRRA § 901 scheduled the GST repeal to sunset on December 31, 2010, after which the Code was to be applied and administered as if EGTRRA “had never been enacted”. The result was that while there was to be no GST tax (and, in fact, no GST tax provisions in effect) in 2010, beginning January 1, 2011, the GST tax provisions were to come back into effect and the GST exemption amount would again track the federal estate tax exemption amount (becoming $1M and adjusted for inflation since 2001 under Code § 2631(c)).

TRA § 301(a) amends the Code to read as if EGTRRA and Code § 2664 had never been enacted, and TRA § 303(b)(2) amends Code § 2631(c) to refer to the federal estate tax exemption amount. As a result, the GST tax exemption amount tracks the estate tax exemption amount without interruption through 2012. The GST tax exemption amount is therefore $5M in 2010 though 2012 (with a possible inflation adjustment after 2011).

(c) Statutory analysis of federal gift tax exemption amount. Prior to EGTRRA, the federal gift tax exemption amount tracked and was equal to the federal estate tax exemption amount. When EGTRRA § 521(b)(1) amended Code § 2505(a), it set the federal gift tax exemption amount at $1M, irrespective of the federal estate tax exemption amount. EGTRRA did not repeal the gift tax in 2010, unlike the estate and GST taxes, and EGTRRA § 521(b)(2) set the gift tax exemption amount to remain at $1M in 2010. EGTRRA § 901, however, did cause the gift tax provisions to sunset on December 31, 2010 and for the Code to be applied and administered thereafter as if EGTRRA “had never been enacted”. The result was that beginning January 1, 2011, the federal gift tax exemption amount would again track the federal estate tax exemption amount, and would become $1M beginning January 1, 2011.

TRA § 301(b) amends Code § 2505(a) to read as if EGTRRA § 521(b)(2) had never been enacted. This eliminates EGTRRA’s special provision for a 2010 gift tax exemption amount and bases the gift tax exemption amount for 2010 gifts on the $1M federal gift tax exemption amount. TRA § 302(b) also amends Code § 2505(a) so that the gift tax exemption amount once again tracks the estate tax exemption amount for gifts made after December 31, 2010. Therefore, the gift tax exemption amount is to increase to $5M for gifts made in 2011 and 2012 (with a possible inflation adjustment after 2011).

(2) Federal Estate, GST, and Gift Tax Rates. The TRA effectively unifies the federal estate, GST and gift tax rates and in each case causes the top marginal rate to be 35% from January 1, 2010 through 2012.

(a) Statutory analysis of federal estate tax rate. EGTRRA § 511 amended Code § 2010(c) and over several years reduced the top marginal estate tax rate from 55% in 2001 to 45% beginning in 2007. As discussed above, EGTRRA § 501(a) also created Code § 2210, which repealed the estate tax for decedents dying in 2010. EGTRRA § 901 scheduled this repeal to sunset on December 31, 2010 and directed that the Code thereafter be applied and administered as if EGTRRA “had never been enacted”. Therefore, beginning on January 1, 2011, the federal estate tax was to return with a top marginal rate of 55%.

TRA § 302 amends Code § 2001(c), setting the top marginal estate tax rate at 35% (applicable to amounts greater than $500,000), TRA § 302(f) applies the 35% rate to the estates of decedent’s dying after December 31, 2009, and TRA § 101 postpones EGTRRA’s sunset until December 31, 2012. Together, these sections create a 35% estate tax rate that is effective from 2010 and through 2012.

(b) Statutory analysis of GST tax rate. Pursuant to Code § 2642(a), the GST tax rate tracks and is equal to the federal estate tax rate. EGTRRA did not change this. However, as discussed above, EGTRRA § 501 did create Code § 2664, which caused subtitle B of the Code (containing the GST tax statutes) not to apply to GST transfers occurring after December 31, 2009, thereby repealing the GST tax with respect to such transfers. Meanwhile, EGTRRA § 901 scheduled the GST repeal to sunset on December 31, 2010, after which the Code was to be applied and administered as if EGTRRA “had never been enacted”. The result was that while there was to be no GST tax (and, in fact, no GST tax provisions in effect) in 2010, beginning January 1, 2011, the GST tax provisions were to come back into effect, and the GST tax rate would again track the federal estate tax rate (becoming 55%).

TRA § 301(a) amends the Code to read as if EGTRRA and Code § 2664 had never been enacted. Alone this would have caused the GST tax rate to track the federal estate tax rate without interruption through 2012, but, as discussed later in this summary, TRA § 302(c) sets a special GST tax rate for 2010. As a result, the GST tax rate is 0% in 2010 and 35% in 2011 and 2012.

(c) Statutory analysis of federal gift tax rate. Prior to 2009, the federal gift tax rate tracked the federal estate tax rate under Code § 2502(a). However, under EGTRRA § 511(d), a separate 35% gift tax rate was created for gifts made in 2010 (as compared to no estate tax in 2010). EGTRRA § 901 scheduled this 35% gift tax rate to sunset on December 31, 2010 such that beginning on January 1, 2011, the gift tax rate would again track the estate tax rate as if EGTRRA had “never been enacted” (becoming 55%).

Effective January 1, 2011, TRA § 302(b) restores Code § 2502(a) to its pre-EGTRRA language. The result is that the 2010 gift tax rate remains 35% under EGTRRA § 511(d), and in 2011 and 2012 the gift tax rate is also 35%, tracking the 35% estate tax rate pursuant to the TRA.

(3) Portability of Estate Tax Exemption Amount. For the first time ever, a surviving spouse is allowed to receive the unused portion of a decedent spouse’s federal estate tax exemption. This concept, called “portability”, permits a surviving spouse’s estate tax exemption amount to be increased by the amount unused by the deceased spouse. The estate of the first spouse to die must file a timely estate tax return in order to elect portability and preserve the unused exemption, even if the estate would not otherwise be required to file. Portability is effective with respect to deaths in 2011 and 2012. Portability is not cumulative in that it applies only to the surviving spouse’s last deceased spouse.

TRA § 303 amends Code § 2010(c) to create portability of the federal estate tax exemption amount between spouses. Moreover, TRA § 302(b)(1)(A)’s amendment to Code § 2505(a) has the effect of permitting a surviving spouse to use a deceased spouse’s unused exemption (in addition to his or her own exemption amount) for the purpose of making lifetime gifts in 2011 and 2012.  Portability does not apply to the GST tax.

(4) Deduction for State Death Taxes. A federal estate tax deduction for state death taxes actually paid remains in effect through 2012.

EGTRRA § 531 amended Code § 2011 to terminate the state death tax credit with respect to the estates of decedents dying after December 31, 2004 (see Code § 2011(f), originally Code § 2011(g)) and also created new Code § 2058 to permit a state death tax deduction in its place. EGTRRA § 501(a) scheduled the deduction to be repealed with the estate tax for 2010, while EGTRRA § 901 scheduled the repeal to end after December 31, 2010 and directed that the Code thereafter be applied and administered as if EGTRRA “had never been enacted”. The result is that there was to be no estate tax and no state death tax deduction with respect to 2010 deaths, and beginning January 1, 2011, the state death tax credit was to return with the estate tax.

The TRA does not affect the state death tax deduction or credit except for TRA § 101’s postponement of EGTRRA’s sunset until December 31, 2012. As a result, the state death tax deduction does not sunset on December 31, 2009, and instead remains effective for 2010 through 2012.

(5) Basis Step-Up. Property passing as a result of a death occurring on or after January 1, 2010 through 2012 receives a step-up in basis.

Pursuant to Code § 1014, the basis of property passing at death is the fair market value of the property at the date of the decedent’s death. Under EGTRRA §§ 541 and 542, “step-up basis” was generally eliminated with respect to the estates of decedents dying in 2010 in favor of “carry-over basis” for all property. More specifically, the estate of a decedent dying in 2010 was allowed to allocate $1.3M in basis increase to estate property and an additional $3M in basis increase to estate property passing outright to a surviving spouse or into a QTIP trust. EGTRRA § 901 caused §§ 541 and 542 to sunset after December 31, 2010. The result is that estates of decedents dying in 2010 were subject to EGTRRA’s new carryover basis regime, but the estates of those dying in 2011 or later were subject to the prior step-up basis regime under Code § 1014.

TRA § 301(a) amends the Code to read as if EGTRRA and Code §§ 541 and 542 had never been enacted. As a result, the step-up basis regime is effective with respect to estates of decedents dying during 2010, 2011 or 2012.

(6) Change in Gift Tax Calculation Method. The gift tax calculation under Code § 2505(a) includes subtracting the amount of the unified credit available. The amount available is calculated by subtracting the amount of credit already used with respect to prior gifts. Under TRA § 302(d)(2), the gift tax rate applicable to the current gift is to be used to calculate the amount of credit used on prior gifts. The effect of this change is to correct for the situation where an individual earlier paid gift tax at a higher rate, using more of his or her unified credit than he or she would have under the TRA’s 35% rate. The estate tax calculation is similarly changed under TRA § 302(d)(1) (also to account for changing gift tax rates). Although a detailed mathematical analysis of the effects of TRA § 302(d) is beyond the scope of this summary, click here for an excellent examination by Steve R. Akers, Esq of Bessemer Trust.

(7) Special Provisions for Transfers Occurring in 2010. The above notwithstanding, the TRA includes special provisions with respect to generation skipping transfers occurring in 2010 and the estates of decedents who died in 2010. These provisions ascribe a 0% GST tax rate to generation skipping transfers made in 2010, permit the personal representative of the estate of a decedent who died in 2010 to choose between the TRA’s 35% estate tax/step-up basis provisions and EGTRRA’s zero-estate tax/carry-over basis provisions, and extend the due dates for filing certain gift or estate tax returns, paying estate or GST tax, or making a qualified disclaimer to no earlier than nine months after the TRA’s date of enactment.

(a) Statutory analysis of 2010 GST tax applicable rate. Under TRA § 302(c), the GST tax applicable rate is 0% with respect to generation skipping transfers made in 2010. The remaining substantive GST provisions remain intact for 2010, including the ability to allocate GST exemption on a timely filed gift or estate tax return to transfers made or deemed to have been made in 2010.

(b) Statutory analysis as to electing out of the TRA. As discussed above, under the TRA, the default estate tax rules for 2010 deaths include a $5 million estate tax exemption amount, a top estate tax rate of 35%, and a basis step-up. However, TRA § 301(c) provides that, as an alternative, a decedent’s personal representative may elect out of the TRA so as to apply EGTRRA’s no estate tax/carry-over basis regime. Instructions from the Secretary of the Treasury on how to make the election are forthcoming. Once made, such election is revocable only with the consent of the Secretary.

(c) Statutory analysis of filing extensions. Under TRA § 301(d)(1), with respect to deaths occurring in 2010 before the TRA date of enactment (December 17, 2010), the due date of estate tax returns, payment of estate tax and for making qualified disclaimers is extended to no earlier than nine months from the date of enactment, resulting in September 19, 2011 as the earliest possible due date (September 17, 2011 is a Saturday). Under TRA § 301(d)(2), the gift or estate tax return due date with respect to generation skipping transfers made after December 31, 2009 and before December 17, 2010 is also extended to no earlier than September 19, 2011.

SELECT INCOME TAX PROVISIONS

(8) Charitable Distributions from an IRA. Through 2012, individuals who are 70½ years of age or older may continue to make qualified charitable distributions from an IRA. An individual may direct up to $100,000 of his or her required minimum distribution from the IRA directly to a public charity. The amount directed will not be included in the individual’s taxable income.

Under Code § 408(d)(8)(F), the ability to make qualified charitable distributions directly from an IRA was scheduled to sunset on December 31, 2010. TRA § 725 postpones this sunset until December 31, 2012, thereby extending this charitable giving technique. [1]

(9) Ordinary Income Tax Rate. The top federal marginal ordinary income tax rate will remain at 35% through 2012.

Over several years, EGTRRA § 101(a) reduced the top federal income tax rate from 39.6% to 35% beginning in 2006. EGTRRA § 901, however, scheduled this rate reduction to sunset on December 31, 2010 and return the top federal income tax bracket to its pre-EGTRRA rate in 2011. TRA § 101 postpones EGTRRA’s sunset until December 31, 2012, thereby extending the 35% top federal income tax rate.

(10) Capital Gains & Dividend Income Tax Rate. The top federal marginal tax rate for long-term capital gains and qualified dividends will remain at 15% through 2012.

JGTRRA §§ 301 and 302 reduced the top tax rate for long-term capital gains and qualified dividend income from 20% to 15% for tax years ending on or after May 6, 2003, and beginning after December 31, 2002, respectively. Although JGTRRA § 303 scheduled these rates to sunset on December 31, 2008, TIPRA § 102 postponed the date of sunset to December 31, 2010. Now, TRA §§ 101 and 102 further postpone the date of sunset to December 31, 2012, thereby extending the applicability of the 15% long-term capital gains and qualified dividend income tax rate.

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[1] Pursuant to Massachusetts General Law c. 62, § 1(c), and as discussed in Massachusetts’ Technical Information Release 06-20 dated November 17, 2006, Massachusetts has adopted Code § 408(d)(8) as “in effect for the taxable year”. This “in effect for the taxable year” language causes Massachusetts to also adopt, absent authority to the contrary, the TRA’s amendment to Code § 408(d)(8)(F) and the extension of this technique.

Alert: Effective Date of Massachusetts Uniform Probate Code Deferred to January 2, 2012

Author:
Brad Bedingfield, Esq., Wilmer Cutler Pickering Hale and Dorr LLP

On January 15, 2009, the Massachusetts Uniform Probate Code (the “MUPC”) was signed into law. Certain provisions of the MUPC, pertaining to guardians, conservators, and durable powers of attorney, came into effect on July 1, 2009. The remainder of the MUPC was set to come into effect on July 1, 2011, and includes provisions that will streamline procedures for appointment of personal representatives and for probate of certain estates, limit court supervision over testamentary trusts, liberalize requirements for disposition of tangible personal property, and change certain default rules relating to intestate succession, division of property among descendants, omitted children, and the effects of marriage and divorce on estate planning documents.

In late 2010, Chief Justice Carey of the Probate and Family Court sought deferral of this July 1, 2011 starting date, in light of certain staffing and budgetary pressures facing the courts. In response to Chief Justice Carey’s request, the legislature included in a supplemental appropriations bill (Bill H5128) a provision (Section 24) deferring implementation of the remaining provisions of the MUPC until January 2, 2012. Governor Patrick signed the bill on January 3, 2011.