2013 Estate Tax Law Update

Anderson Banta Clarkson, PLLC

2013 Estate Tax Law Update
by Tom Bouman

Effective January 1, 2013, the “American Taxpayer Relief Act of 2012” signed by President Obama, provides a welcome dose of certainty to the estate tax laws.  The new law maintains the current law for the most part, while indexing the estate, gift, and generation-skipping transfer (“GST”) tax exemptions for inflation.

For persons dying in 2013, the estate, gift, and generation-skipping transfer (“GST”) tax exemptions are $5.25 million, up from $5 million in 2012.  The maximum federal tax rate is 40% (up from 35% in 2012).  The new law continues to permit unlimited deductions for qualified transfers to a surviving spouse or charities.

A major feature introduced by the 2010 Tax Relief Act – “exemption portability” – was made permanent by the new law.  This feature allows married couples to share their estate tax exemptions, making it simpler to shelter up to $10.5 million from estate taxes.  For example, if Husband dies in 2013 with a $2 million estate, then Wife may have an $8.5 million exemption ($5.25M for Wife + $3.25M unused by Husband).

At first glance, the portability feature provides an attractive alternative to the traditional use of a Credit Shelter trust (aka Bypass trust) during the lifetime of the surviving spouse.  In fact, it may be the best choice in some situations.  However, a closer look reveals many reasons to continue with traditional planning rather than rely on portability of the unused exemption.
 

1. In order for Wife to claim the additional unused exemption upon Husband’s death, she will have to file a federal estate tax return (when it would otherwise be unnecessary).
2. A Credit Shelter trust provides asset protection for the surviving spouse (outright distribution does not).
3. A Credit Shelter trust protects the deceased spouse’s children in the event of remarriage by the surviving spouse.
4. Any appreciation of assets in a Credit Shelter trust is exempt from estate tax, but the “portable” exemption amount is not inflation-adjusted. 
5. Many states (not Arizona) have a separate estate tax, but do not provide the same portability offered by the federal tax system.
6. The portability feature is only applicable if both spouses die when the feature is in effect.  Of course, Congress could change the law at any time.

Whether a person is married or single, if the person’s current net worth – plus the value of life insurance death benefits – is more than $1 million, an estate plan review is appropriate in light of the new tax law.  If married, it is important to review any formulas used in the will or living trust that would be used to allocate assets to a Credit Shelter trust upon the death of the first spouse.  The $5.25 million exemption amount and portability rules may provide an opportunity to simplify the tax planning components of the estate plan.

I also want to counsel against overemphasis of estate tax planning.  This is only one component of a comprehensive estate plan, which includes a wide array of non-tax objectives.  However, the changing tax landscape should serve as a reminder that we should all revisit our estate plan regularly.

About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

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Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
Book an Appointment online 24/7
or call during business hours

(520) 546-3558

Can a Trustee Keep Trust Matters Private from Beneficiaries?

Stephen F. Banta, P.L.L.C.

What You Should Know About Trust Beneficiary Notices and Trustee Reports
by Tom Bouman

1.         May a Trustee keep all trust matters private from the beneficiaries?


No.  Under Arizona law, the manager of a trust (“trustee”) has a duty to inform and report to the beneficiaries of the trust.  The duty to inform includes an initial requirement to notify the beneficiaries within 60 days after a formerly revocable trust becomes irrevocable (usually after the trust creator’s death) or within 60 days after the trustee accepts the duties of trusteeship.  The duty to report includes an annual requirement to deliver a trustee’s report to current beneficiaries.
The notice and reporting requirements do not apply to a revocable living trust provided the trust creator is alive and serving as trustee.
The trustee also has a general duty to keep the qualified beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for the beneficiaries to protect their interests.  The definition of “qualified beneficiary” includes both current beneficiaries, and the contingent beneficiaries who would inherit if a current beneficiary died or the trust was dissolved.
There are two exceptions to this general duty.  First, the trust document might include a statement to the opposite effect, instructing the trustee, to the extent permitted by law, to refrain from distributing information about the trust to the beneficiaries.  Second, the trustee may decide that a beneficiary’s request for information is unreasonable under the circumstances.

However, not all information may be withheld.  Regardless of what the trust document says about the subject, the trustee must provide a copy of the portions of the trust document that are necessary to describe the beneficiary’s interest to any beneficiary who makes the request.  In addition, the trustee must provide a trustee’s report to current beneficiaries, and other beneficiaries who request it, at least annually.  This report serves to provide a minimum amount of essential information about the trust to the beneficiaries.  Arizona law does not permit the creation of a secret trust fund for a beneficiary.


2.         What are the requirements of a Trust Beneficiary Notice?


The trustee must deliver an initial trust beneficiary notification to all qualified beneficiaries of the trust.  The notice must (1) state the trustee’s name and contact information; (2) disclose the beneficiary’s right to request a copy of the portions of the trust document that are necessary to describe the beneficiary’s interest (generally, a copy of the entire document); and (3) disclose the beneficiary’s right to receive or request a trustee’s report at least annually.

3.         What are the requirements of a Trustee’s Report?


A trustee’s duty to report is met by delivering a trustee’s report to each current beneficiary of an ongoing trust, and other beneficiaries who request it, at least annually.  A current beneficiary is someone who is able to receive distributions from the trust at that time – whether mandatory or in the discretion of the trustee.  Other beneficiaries are entitled to a trustee’s report upon request.
The annual trustee’s report must include an up-to-date list of trust assets and liabilities accompanied by a ledger showing all receipts and disbursements during the prior reporting period, including the source and amount of the trustee’s compensation (if any).  There is no statutory form for this report, although it should be detailed enough to satisfy the curiosity of a reasonable beneficiary. 


4.         What is the format of a Trustee’s Report?


Unless the trustee’s report is intended for use in a court proceeding, the report need not use any prescribed format.  For the disclosure of trust assets, a simple Word document or Excel spreadsheet with a list of assets and their current values, if feasible, is adequate.  A similar list could be used for liabilities and trustee compensation, if needed.

For the disclosure of receipts and disbursements, an Excel spreadsheet is commonly used to supplement the regular statements from a financial institution, although a handwritten ledger also works fine.  The spreadsheet or ledger should track each transaction into and out of each account by (1) date, (2) payor/payee, (3) description, (4) check number, if appropriate, and (5) running balance.  A trustee may wish to include a copy of the most recent statement from each financial institution holding trust assets in order to back up the integrity of the report.

The report may be delivered by first class mail, personal delivery, delivery to last known place of residence, or by e-mail if the address is valid.  Notices are not required for a beneficiary who cannot be located by the trustee after reasonable effort.

About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

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Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
Book an Appointment online 24/7
or call during business hours

(520) 546-3558