Newsletter: March/April 2011

March 18, 2011

In this issue: Federal Estate & Gift Tax Reforms Possible; Ohio Domestic Asset Protection Trust Planning; Creditor Protection Planning With Inherited IRAs

FEDERAL ESTATE & GIFT TAX REFORMS POSSIBLE

President Obama's 2012 budget proposals include permanent estate and gift tax reforms.

A February 14, 2011 publication released by the Department of the Treasury explained how the President's 2012 budget proposals presume several important changes in the estate, gift, and GST taxes.

These changes include:

• Restoring the 2009 estate, gift and GST tax rules on January 1, 2013. These rules would provide for a top estate, gift and GST tax rate of 45%, a $1 million gift tax exclusion, and a $3.5 million estate and GST exclusion amount;
• Making portability of a deceased spousal unused exclusion amount – which was provided for in the 2010 Tax Relief Act – permanent;
• Requiring consistency in the valuation of property for income and estate tax purposes, so that beneficiaries are required to use estate tax values to determine the adjusted basis of property received by those beneficiaries from a decedent;
• Permitting the Treasury to issue regulations that expand certain sections of the Internal Revenue Code in order to ignore a new category of "disregarded restrictions" in valuing partnerships, LLCs, and other entities, so as to reduce the use of valuation discounts for such entities;
• Requiring a minimum 10-year term for GRATs, prohibiting so-called "Zeroed Out" GRATS, and preventing the use of decreasing annuity payments in establishing a GRAT; and
• Providing that the allocation of GST exemption to a transfer will only protect the transfer from the imposition of the GST tax for 90 years.

In the ever-changing estate, gift and GST tax environment, it is now more important than ever to talk to your clients about these issues and the implications that certain planning strategies – including not planning at all – may have. Please feel free to contact us with any specific questions or concerns that you have regarding these tax planning items.

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OHIO DOMESTIC ASSET PROTECTION TRUST PLANNING

A new proposal from an Ohio State Bar Association sub-committee seeks to pave the way for Ohio Domestic Asset Protection Trusts.

The Legacy Trust sub-committee of the Ohio State Bar Association's Council of Estate Planning, Trust and Probate Law Section recently announced that after two years of research and drafting, it has finalized its proposal for the "Ohio Legacy Trust Act"; a type of domestic asset protection trust statute already adopted in 12 other states around the country.

An asset protection trust, or "Legacy Trust", simply put, is a type of irrevocable spendthrift trust that is designed to provide for the benefit of the grantor of the trust and the grantor's family members while simultaneously insulating the trust's assets from attachment by the grantor's creditors.

Certain limitations, of course, apply to the level of protection that can be afforded by such an arrangement. For example, transfers in violation of the so-called "fraudulent transfer" rules with regard to a specific creditor are voidable with regard to that specific creditor. In other words, as articulated in a feature article in Ohio Lawyer Magazine authored by some of the members of the Legacy Trust sub-committee, "Legacy trusts are designed to protect against future problems that might never occur, but which could be catastrophic if they did, and are not designed to ‘stiff' existing claim holders."

While the proposed statute has yet to come before the Ohio legislature, adoption of a domestic asset protection trust statute in this state could provide an exceptionally potent and viable asset protection and estate planning tool for clients seeking to protect their hard-earned nest eggs from financial calamity or other misfortune.

We will continue to provide you with additional information on the proposed Ohio Legacy Act as the same becomes available to us.

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CREDITOR PROTECTION PLANNING WITH INHERITED IRAs

Can bankruptcy creditors get at an inherited IRA? Federal district courts are divided...

A recent court opinion out of Arizona states that bankruptcy creditors cannot reach an inherited IRA account. Other district courts, however, have held oppositely, ruling that inherited IRAs can, in fact, be attached to satisfy creditors' claims in a bankruptcy proceeding.

A reliable solution to hedge against an unfavorable ruling in the context of bankruptcy proceedings is to designate a trust for the intended IRA recipient, rather than the individual him or herself, as the beneficiary of the client's IRA. In such an arrangement, because the beneficiary of the trust is not deemed to have an actual ownership interest in the IRA, the account itself would be protected from such a creditor attack. Of course in order for the trust to fully insulate the IRA from such an attack, the trust itself must contain certain terms and provisions that prevent the beneficiary's interest in the trust from being construed as a financial resource of that beneficiary.

Designating a trust as an IRA beneficiary also raises certain issues that affect the trust beneficiary's distribution options following the client's death. The most pressing question, of course, is whether the required minimum distributions from the IRA can be "stretched out" based on the trust beneficiary's life expectancy. Again, the answer to this question is "yes", provided that the terms of the trust comply with the relevant IRS regulations on this issue.

At Smith and Condeni, we emphasize not only the importance of incorporating clients' IRAs into their overall estate planning arrangement, but also of ensuring that a client's trust is designed appropriately to address creditor protection and IRA distribution concerns.

We encourage you to contact us to discuss how, working together, we can ensure that your clients' asset protection questions and concerns are answered, and that they are addressed as integral components of the wealth management planning that you are currently providing to them.