Administrator Must File for Portability for Surviving Spouse, Court Says

People reviewing documentsThe administrator of a decedent's estate in Oklahoma appealed an order from the trial court forcing the administrator to file a federal estate tax return for the estate and elect portability of the Deceased Spousal Unused Exclusion Amount (DSUE) under the federal gift and estate tax laws. The surviving spouse asked for the order and wanted the benefits from the portability election.

In “In the matter of Estate of Vose,” 390 P.3d 238 (Okla. 2017), reported in Justia, the administrator argued that the district court erred on several grounds. One of the decedent’s children by a prior marriage refused to make the required election for transfer, even though the surviving spouse agreed to pay the cost required to prepare the required federal estate tax return.

Since 2010, a spouse has been permitted to transfer, at death, his or her unused gift and estate tax exemption to the surviving spouse. Prior to that date, each spouse had his or her own gift and estate tax exemption, but any portion of that exemption that remained unused by the spouse at death couldn’t be transferred to the surviving spouse.

The Court saw no merit in the personal representative’s argument that the surviving spouse didn’t have standing. The Court said the right to portability of the DSUE was a beneficial interest in the estate for the surviving spouse, regardless of the surviving spouse’s rights as an heir. As a result, the right to portability was an interest that qualified the surviving spouse to bring the lawsuit.

The estate’s administrator also claimed that the couple’s premarital agreement was a waiver by the surviving spouse of any rights to the estate making a portability election. However, the State Supreme Court said the right to portability became law in 2010, which was years after the premarital agreement was signed in 2006. Although the Court found that the couple did agree to a broad waiver of marital rights under the existing law when the premarital agreement was signed, the agreement didn’t speak to the issue of portability, because it wasn’t in the tax code at that point in time.

The Supreme Court upheld the trial court’s decision that the personal representative’s fiduciary obligations to protect estate assets applied and required him to preserve and transfer the decedent’s unused federal estate tax exemption to the surviving spouse.

The Oklahoma Supreme Court rejected these arguments and said that “[a]n administrator of an estate occupies a fiduciary relationship toward all parties having an interest in the estate.”

Accordingly, 26 U.S.C.A. § 2010 requires the administrator to make the election to allow portability of the DSUE, and the only person with an interest in and ability to use the DSUE (if it exists) is the surviving spouse. If the election isn’t made through the timely filing of an estate tax return, it’s lost.

The Oklahoma Supreme Court found no reversible error by the trial judge and affirmed.

Reference: Justia (January 17, 2017) “In the matter of Estate of Vose”


How is Life Insurance Taxed in an Estate?

Question mark with peopleNJ.com’s recent post asks “Is inheritance tax owed on life insurance?” The article advises that it's important to understand how your assets will be taxed when you die. Here’s a review of all the rules in New Jersey. Those residents must look at three potential death taxes: the federal estate tax, the New Jersey estate tax and the New Jersey inheritance tax.

The current IRS code lets each taxpayer pass $5.49 million federally tax-free to anyone cumulatively during life or at death. There’s also the notion of portability. With portability, a surviving spouse may be able to use any unused federal estate and gift tax exemption of his or her "last deceased spouse." Therefore, with proper planning, a married couple may be able to pass at least $10.98 million federal estate and gift tax free.

The New Jersey estate tax is scheduled to be repealed next year.  However, until that time, anyone dying in 2017 can pass $2 million free of estate tax. It is important to note that the state doesn't recognize portability.

New Jersey and federal estate taxes are calculated based on the decedent's gross estate less certain deductions, like funeral and administrative expenses, debts, charitable donations and outright bequests to a surviving spouse or bequests made to the surviving spouse in the form of qualified trusts. All assets owned or controlled by the decedent are typically going to be included in the gross estate. This will include any life insurance owned or controlled by the decedent and paid to either a third-party beneficiary or the estate.

However, the state’s inheritance tax is assessed differently—it’s levied against certain bequests and transfers within three years of death, based on the relationship between the deceased and the beneficiary, and the value and nature of the asset transferred. There’s no inheritance tax imposed, if the beneficiary is a spouse, domestic partner, civil union partner, grandparent, parent, descendant or stepchild of the decedent (called “Class A beneficiaries) or a charity. The value and nature of the bequests are irrelevant, if the beneficiary is in one of these categories. These relationships are exempt from inheritance tax. If the beneficiary is not in one of these categories, then the relationship to the beneficiary and the value and/or nature of the bequest must be examined.

Some assets are also exempt from the New Jersey inheritance tax, such as life insurance. But it must be paid to a named beneficiary or a trust for the benefit of that beneficiary. Life insurance owned by a decedent isn’t exempt from the inheritance tax, if it’s paid to the estate.

Reference: NJ.com (March 28, 2017) “Is inheritance tax owed on life insurance?”


Check with Your Estate Planning Attorney about New Laws Now in Effect

Estate_planning_familyDetermining a process for passing assets on to heirs is an integral part of the estate planning process. But it's not always easy to determine the wisest path, given the many options available, as well as changing tax laws. Beneficiary designations on life insurance policies and retirement plans are one way to avoid sending assets through the probate process. Homes and autos are usually jointly owned. If an individual is single or the asset is held in just one name, the estate will go through probate. Assets passing via a will document also go through probate.

The (Anderson, IN) Herald Bulletinarticle, "Changes in laws can affect your estate planning," explains that the revocable grantor trust was created with the thought of assisting people in avoiding probate. A revocable grantor trust roles include the grantor (the person making the gift), the trustee in charge of the trust (typically the grantor), the income beneficiary (also usually the grantor), and the remainder beneficiary. Taxes from investments and income are reported on a standard tax return. When assets are placed in a trust ("funding the trust"), individuals have control and the use of the assets. Ownership is structured so that there is no probate. Individuals should fund the trust with as many assets with which they are comfortable (except IRAs and retirement accounts).

The article notes that under previous laws, a lot of time would be taken in deciding whose trust would be funded with what assets. Typically, two trusts would be set up right away for married couples, with the idea that when the first spouse passed, the survivor would be able to use unified credit to avoid tax liability. Before a recent law change on "portability," or the application of the tax credit, individuals had to use it or lose it. As a result, spouses would have to have two trusts—both revocable—and when one spouse passed, their trust would become irrevocable. Income typically would all be paid out to the surviving spouse. However, the assets remained in the trust for subsequent beneficiaries.

With portability, a person doesn't have to use it or lose it when the first spouse dies. This change makes it imperative that people re-examine their trusts and fund a single trust.  But, before you go and make changes, you need to sit down with your estate planning attorney to see if your estate plan needs to be updated.

The article acknowledges that we all like to compartmentalize decisions, and that it's especially easy to do so with estate planning. Who wants to talk about what's going to happen after you're dead? Not a popular topic with most people. Even so, poor planning—or no planning—can really impact investments and tax planning, as well as plant the seeds for a major headache for your heirs. Talk over all of these important matters with your estate planning attorney, so that you can make informed decisions about the future.

For more information about estate planning, please visit my estate planning website.

Reference: The (Anderson, IN) Herald Bulletin (July 10, 2015) "Changes in laws can affect your estate planning."


Four Important Dates to Consider When Reviewing Your Estate Plan

Important-Dates-1Whenever clients ask if they need to update their will or trust, the first question back to them is: “When was it created?” If they say it was 10 to 15 years ago or longer, the attorney may react like they found expired food in the fridge because it may not be safe to use something that old. Your family and personal situation has probably changed a lot since then (perhaps your will or trust was created when your children were in high school, but now they’re married with kids). The tax laws have changed a lot over the years, too.

The website nextavenue.org recently posted a very informative article, titled “Why Your Will May Be Out of Date,” which states that although your estate planning documents are still valid, they may no longer work the way you originally thought they would.

But how do you know if your estate plan is out-of-date? If your will or trust was created prior to the four key “freshness dates” listed below, it’s time to visit your estate planning attorney for a review.

April 14, 2003: the required HIPAA compliance date. The HIPAA privacy rule imposed strict guidelines on the disclosure of “protected health information” (or PHI) without the patient’s express permission. The privacy protections are designed to help us, but they could be problematic if your executor, trustee or agent (under a durable power of attorney) needs to speak about your personal details with your employer, insurer, or medical providers. The rule says that to act on your behalf, an authorized person must have a written document executed by you, with very specific language required by HIPAA. The article says that if your will, revocable trust, durable power of attorney or health care power of attorney was executed before April 14, 2003, your executor, trustee or agent may have some trouble working with your medical providers and insurers. Talk to an estate planning attorney and have him or her update your documents to include the required HIPAA language.

January 1, 2005: if you live in a state that imposes its own state-level estate or inheritance tax. Prior to 2001, there was a federal credit for state death taxes, varying by the size of the estate. There was little incentive to make plans for avoiding state death taxes because those taxes were totally offset by the federal credit. However, the Economic Growth and Tax Relief Act of 2001 (EGTRA) phased out the credit between 2002 and 2004, and since January 1, 2005, state estate or inheritance taxes apply in addition to any federal estate tax. There are now 15 states that impose their own state estate tax. Seven states have an inheritance tax. Several states have both. If you live in a state that imposes its own estate tax and your will or revocable trust was executed before 2005, you need to talk to your estate planning attorney about these state taxes.

December 17, 2010: the enactment date of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“TRA 2010”). This upped the federal estate tax exclusion to $5 million for 2010 and indexed it to inflation after that. For 2015, the federal estate tax exclusion is $5.43 million. In effect, TRA 2010 eliminated the federal estate tax for thousands of people, so if your estate plan was created before December 17, 2010, your estate planning documents may contain federal tax-planning provisions that are no longer needed. Talk to your estate planning attorney about a better and simpler plan. However, the reverse may be true if you live in one of the 20 states that imposes a state estate tax or inheritance tax. There may be a more sophisticated plan you need to consider with your attorney to deal with state estate taxes, as they usually start at a much lower threshold. The article stresses that tax laws are drastically different today: estate planning documents drafted before December 17, 2010 may produce unexpected or unfavorable results.

January 2, 2013: the American Taxpayer Relief Act of 2012 (ATRA) went into effect. This is important for married couples with a combined taxable estate exceeding $5.43 million – it made the “portability election” a regular feature of federal estate tax planning, which allows an executor to transfer a deceased spouse’s unused federal estate tax exclusion to a surviving spouse, a very important estate-planning tool. So, if you are married and your will or trust was drafted before January 2, 2013, you need to sit down with your attorney—you might be missing out on valuable tax planning opportunities.

For more information about estate planning, please visit my estate planning website.

Reference: nextavenue.org (April 27, 2015) “Why Your Will May Be Out of Date”


Single People and Estate Planning / York, PA

SingleThe number of singles is steadily growing. In 1970, slightly more than a third of Americans age 15 and older were single, according to the U.S. Census. By last year, their numbers approached 50%. Among U.S. citizens aged 65 and older more than half (53%) of women and more than one quarter (26%) of men were unmarried last year. That amounts to 18 million divorced, never-married or widowed seniors.

Accordingly to a recent Wall Street Journal article titled Estate-Planning Essentials for Single People, single people face some unique estate planning issues. This is true whether they have always been single or now single again.

The original article reviewed several areas that should be of concern when it comes to estate planning for singles, to include:

Heirs. If you die and don't have a will or trust, your property may be divided up by the probate court according to the laws of your state. While that might work for some married couples who have children, it rarely works for single people. Typically, if you're married and you die without a will or trust, your spouse inherits most if not all of your assets. On the other hand, if you're single and die intestate, your estate could get distributed in unintended ways. Generally it passes first to your children (if any), then to your parents (if they're alive), any siblings, then more-distant relatives. Last, if no living relatives can be found, the state will take it!

So you can see how important it is to at least create a will and/or a revocable living trust that states specifically how you want your assets to be distributed after you die, as well as to name an executor and/or trustee to carry this out.

Decision Makers. If you don't designate an individual to take care of your financial and medical affairs in the event of your incapacity, your assets and care could fall into the hands of a distant relative or a stranger appointed by a judge. Be sure to sign a general power of attorney, an advance health-care directive, and an authorization for federal HIPAA laws to empower trusted individuals to make financial and medical decisions on your behalf in the event you become incapacitated. For those without spouses or children to fill these roles, it's especially important for single people to take care of this.

Estate Taxes. Any tax liability for your estate depends on how you are single. If you never married or you're divorced, any of your estate that's more than the federal individual exclusion is subject to tax. If you are a recent widow or widower, your federal exclusion amount includes—not only the individual estate-tax threshold—but also may include any unused portion of your deceased spouse’s exemption amount, which is termed “portability.” This is true even if you remarry. While the federal estate-tax exemption has risen in recent years, 19 states plus D.C. impose estate taxes of their own and/or inheritance taxes on the heirs who receive these assets.

Just a few states follow the federal portability rules, so you might need to create a special trust to make use of two exemptions. An experienced estate planning attorney can assist you with this.

If you are single or know someone who is, then these estate planning moves should be made without delay. This is not a do-it-yourself project either.

Reference: Wall Street Journal (December 7, 2014) Estate-Planning Essentials for Single People

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