Estate Planning Articles

Florida estate planning and probate attorney Stephen G. Melcer represents U.S. and international clients in the communities of Boca Raton, Fort Lauderdale, Palm Beach, Del Ray Beach, Pompano Beach, and Boynton Beach in Broward County and Palm Beach County. Contact the firm's Boca Raton law office for more information or to schedule an appointment.

• Durable Power of Attorney
• Federal Estate and Gift Tax Phase out and Repeal
• Gift Tax
• Future Predictions
• Planning for the Future
• Annual Exclusion Gifts
• Charitable Remainder Trusts
• Charitable Lead Trusts
• Personal Residence Trusts (House GRITs)
• Use of Revocable Trusts

"Springing" Durable Power of Attorney

Many Floridians have executed "Durable Powers of Attorney." This document appoints someone, most frequently the spouse or a child, as an "Attorney-in-Fact," who then has legal authority to immediately use the power to handle the client's assets or other financial affairs. This Power of Attorney survives the client's incapacity, but in the past could not be conditioned on his or her incapacity.

Many people were uncomfortable giving their Attorney-in-Fact immediate access to their assets, while they were well and capable of managing their own affairs. New legislation, which went into effect on January 1, 2002, allows a person to condition the Power of Attorney on the existence of their inability to "manage property." Upon execution of an affidavit by the client's primary physician that the client is unable to manage his or her property, the Power of Attorney becomes effective.

Individuals interested in using the new "springing" Power of Attorney, or the traditional Power of Attorney, should contact our office. Before choosing the "springing" Power, however, I would offer some food for thought. If someone is reluctant to give a Power of Attorney to an individual while he is capable of managing his own affairs, he should in fact be more uncomfortable with this person having this power when he is incapable of supervising him, and ought to examine other methods of incapacity planning.

Federal Estate and Gift Tax Phase Out and Repeal

As most people are aware by now, last year President Bush signed into law a bill that phases out the estate tax over a ten-year period until it is fully repealed in 2010. However, a "sunset" provision will reinstate the tax in 2011, if congress takes no further action before then. This is a result of the "Byrd Rule" of the Senate, which does not permit tax cuts to last longer than 10 years unless passed with 60 Senate votes. This bill received only 58 votes in the Senate. The following chart illustrates the changes in exemption and tax rates over the next 10 years:

Gift Tax

As noted in the above illustration, the Federal Gift Tax is never fully repealed and the maximum exemption never exceeds $1,000,000. This was implemented to avoid people repeatedly transferring assets among family members to shift income recognition.

Future Predictions

Many believe that in the event of any political change during the next 10 years, Congress will revisit this issue. Most observers believe that if the issue is revisited one might anticipate the exemption to be frozen at somewhere around $2,000,000 and the top rate limited to around 45%.

Planning for the Future

Individuals who have had documents properly prepared which utilize tax planning with a "Credit Shelter Trust" either in their wills or in their Revocable Living Trusts, do not need to do anything to reduce estate taxes. These documents, if properly prepared, generally employ a formula that uses the appropriate exemption available at the time of death.

Some individuals may wish to keep an eye to the future. Married couples, who know with certainty that their combined assets will be less than $1,000,000 after January 1, 2002, may wish to simplify their plans and eliminate trusts that were created to avoid taxes. Those who anticipate that their combined estates will be less than $1,500,000 in 2004, less than $2,000,000 in 2006 or less than $3,500,000 in 2009, may wish to change their plans to utilize "disclaimer" Credit Shelter Trusts. This would permit the surviving spouse to determine, at the time of the death of the first spouse, whether or not to use a Credit Shelter Trust, based upon circumstances as they may then exist.

Those individuals who have started gifting plans should follow through with them with one caveat. Those who are reasonably certain that their estates will not exceed the new exemptions and were otherwise gifting assets with unrecognized gains, may choose to retain these assets in order to benefit from a stepped-up basis.

Annual Exclusion Gifts

The annual exclusion for current gifts to individuals remains at $12,000. Many people rush to make annual exclusion gifts of $12,000 to children and grandchildren at the end of the year. These gifts are excludable from tax and reporting for gift tax purposes, if they do not exceed $12,000 per person. However, there are several situations where filing a gift tax return, prior to April 15, 2003, is necessary or advisable.

• If one spouse gives $24,000 to an individual, it is necessary for that spouse to file a gift tax return and have the other spouse sign an election to apply his or her $12,000 exclusion to that gift.
• Gifts made to a trust, even though less than $12,000, may require the filing of a gift tax return.
• If gifts to a trust were designed to qualify for the annual exclusion, "CRUMMEY LETTERS" must be properly mailed to the respective beneficiaries, and it may be necessary to file a gift tax return to allocate Generation Skipping Tax Exemption to the Trust.

The Generation Skipping Tax Exemption is currently $2 million, but is indexed to inflation and may increase next year depending upon the final inflation figures for the year. The IRS will announce future exemptions in an annual revenue procedure.

Charitable Remainder Trusts

A charitable remainder trust provides for annual payments to non charities (such as individuals) with a remainder ultimately passing to charity. The person who creates a charitable remainder trust usually is entitled to an income tax deduction for the actuarial value of the remainder committed to charity. As a general rule, that deduction is a small portion of the value of the property transferred to the trust. See, e.g., PLR 9139006 (June 26, 1991) (not precedent). However, the value of the charitable remainder must be at least ten percent (10%) of the value of the property transferred to the trust.

In addition, a charitable remainder trust usually is exempt from income tax. That tax exemption can benefit not only charity (by preventing the trust property from being eroded by taxes) but the individual beneficiaries of the trust as well. That may occur whenever taxable income in the trust (including capital gain) exceeds the current payout for the year. Where the trust experiences taxable income (such as a large capital gain) in excess of the current payout to the individual beneficiaries, the excess taxable income accumulates tax free (or tax deferred) in the trust to provide a larger base of wealth to produce earnings for the beneficiaries in the future.

As a consequence, in some cases individuals contribute appreciated assets to charitable remainder trusts, retaining the right to annual payments. However, only individuals who have a sincere desire ultimately to benefit charity should consider charitable remainder trusts. It appears to be the position of the Internal Revenue Service that the gain experienced on appreciated assets contributed to a trust will be attributed directly to the grantor of the trust if there was an understanding between the grantor and the trustee that the appreciated assets would be sold by the trustee. However, more recent private letter rulings (not precedent) indicate that the Service may attempt to attribute gain to the grantor, as a general matter, only if the trustee is legally obligated to sell the assets contributed to the trust. Cf. PLR 9452020 (not precedent) with PLR 7737071 (not precedent). See also Notice 94 78 (not precedent). Note that a grantor may also experience gain when contributing property subject to debt to a charitable remainder trust or, in some cases, be subject to excise tax under Code Sec 4941. See PLR 9533014 (not precedent). Cf. Ebben v. CIR, 783 F. 2d 906 (9th Cir. 1986).

In addition to individuals who hold appreciated assets, other persons who may wish to create charitable remainder trusts include married individuals who want their property ultimately to pass to charity. Also, where a client's estate is likely to include a significant amount of income in respect of a decedent (IRD), such as interests in pension plans or IRAs, the individual beneficiaries of the client may wind up with a significantly greater base of wealth if such assets are made payable to a charitable remainder trust so that they are not subject to income tax (by reason of the trust's income tax exemption).

Moreover, certain charitable remainder trusts (especially "income only" charitable remainder trusts) can be used, in some cases, as a mechanism to build a greater base of wealth later in life. Hence, individuals who wish to save for their future as well as to benefit charity may be appropriate candidates to consider such trusts.

Charitable Lead Trusts

The use of Charitable Lead Trusts (CLT's) is a valuable, often overlooked, estate-planning tool. While charities often emphasize the use of charitable remainder trusts (CRT's), CLT's also offer great planning opportunities. CLT's and CRT's are both "split-interest trusts." The better-known CRT makes periodic payments to the Donors or their family and then terminates and is distributed to charities after some period of time. On the other hand, the CLT makes periodic payments to charities and then terminates and is distributed to the Donor's family.

The respective values of the gift to charity and the gift to family are computed using complex present value computations, with an assumed interest rate published monthly by the Internal Revenue Service. This rate is commonly known as the §7520 rate. The November, 2002, rate was 3.6%, which was the lowest the rate has ever been!! When a donor's assets have yields exceeding this §7520 rate, the resulting computation exaggerates the value of the charitable portion of the gift, thus reducing the taxable value of the gift. For example, assume a husband and wife, aged 72 and 70, contribute $1,000,000 to a charitable trust that will pay the couple's charitable gifts for the remainder of their lives. Based on the current §7520 rate, the taxable value of the gift may be as low as $94,000. If the Donors had retained the assets and donated the income themselves, the entire $1,000,000 would be part of their estates and subject to estate or gift tax. Thus, by establishing the trust the Donors would ultimately avoid future gift or estate taxes on $906,000! These figures will vary, depending upon the assets' rates of return.

Personal Residence Trusts (House GRIT's)

Code Sec. 2702 prescribes special valuation and deemed gift rules when a taxpayer transfers a partial interest in property (such as a remainder interest) for family members while retaining another partial interest in the property (such as an income interest for a term of years). A grantor retained income trust, or "GRIT," is a trust in which the grantor retains the right to the income from or use of the property transferred to the trust for a period of years. As a general rule, the value of the retained interest is treated as zero. The effect of the general rule is to value the gift of the partial interest (such as the remainder) at the full value of the asset and, accordingly, to subject that full value to immediate gift tax. Hence, a GRIT usually cannot be used as an effective estate-planning tool where the interest in the trust will pass to members of the client's family.

One of the exceptions under Code Sec. 2702 is for a transfer of a remainder interest in a personal residence. In a circumstance where the value of a personal residence does not decline in value, transferring a remainder in the home to family members (such as children) may reduce the gift and estate tax otherwise payable on the value of the home when it ultimately is transferred to other family members. Transferring a remainder in a home usually will be effective as an estate planning arrangement, however, only if the property owner lives beyond the term for which he or she retained the right to use the home as his or her personal residence.

Individuals who are in good health, own homes (or intend to acquire them) and who can afford to give up the use of the home prior to death may be appropriate candidates for House GRIT's.

Use of Revocable Trusts

Revocable trusts can be used to achieve a variety of goals, including avoiding the so called "probate process," providing a mechanism to manage property during the owner's lifetime (especially during any time difficulty is experienced in managing financial affairs), and as an arrangement to facilitate financial and estate planning. Often individuals and their attorneys will hold strong prejudices for or against the use of revocable trusts. It is appreciated that these views often are based upon actual experience. Nonetheless, it seems that a reasonable contention can be made that an objective assessment should be made for each person as to whether, or the extent to which, using one or more revocable trusts is appropriate.

Revocable trusts often can reduce expense and complexity in the administration of property after death. However, use of a revocable trust usually involves drafting an additional instrument and arranging for title to property to be changed to the trust during life. That may mean there will be more expense during life in using a revocable trust. However, using the trust may be more cost effective in the long run.

Many ramifications can occur by using a revocable trust. These effects may occur during lifetime or after death. Sometimes, the effects will be better using a trust; sometimes, they will be worse. In particular, the after death tax effects often can be quite different. It usually is appropriate to explore the potential ramifications in using a revocable trust. Often, it will turn out that certain assets should be transferred to and disposed of under the trust and other property disposed of by Will.

Boca Raton, Florida, estate planning, tax, and probate attorney Stephen G. Melcer represents
U.S. and international clients in Florida communities such as Boca Raton, Fort Lauderdale, Palm Beach, Del Ray Beach, Pompano Beach, and Boynton Beach in Broward County and Palm Beach County.

Law Offices of Stephen G. Melcer

2385 North West Executive Center Drive
Suite 190
Boca Raton, FL 33431
Telephone: (561) 392-5606 • Fax: (561) 392-5533
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