Installment E of A to Z is ESTATE TAX EXEMPTION.  This is an estate tax term that is equal to the amount of assets that an estate can transfer without incurring estate taxes. The related term is the estate tax exemption credit, which is equal to the amount of estate tax credit against the estate tax.

The federal estate exemption credit has been tinkered with mightily over the past decade or so.  For the years 2011 and 2012, the federal exemption is equal to $5,000,000.00, which corresponds to an estate tax credit of $1,730,800. Alas, beginning January 1, 2013, the estate tax exemption credit is scheduled to be reduced to $1,000,000.00, unless a new law is enacted by Congress between now and then.

If you are curious as to what the South Carolina estate tax exemption amount is, SC does not currently impose a separate estate tax. See my prior post where I discuss the unceremonious end of the South Carolina estate tax here. 

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation. 

Installment D of A - Z is DISCLAIMER.

Internal Revenue Code section 2518 allows a South Carolina beneficiary to execute a qualified disclaimer, resulting in transmission of the disclaimed property as if the disclaimant had predeceased the decedent. Utilizing disclaimers as part of the estate plan builds in flexibility.  This technique can be used in the context of disclaimer trust planning for estate tax purposes, or in the context of IRAs and qualified plan transmission to accomplish favorable income tax treatment, to describe but a few uses.

Treasury Regulation section 25.2518-2 lists the following “Requirements for a Qualified Disclaimer”.

(a) In general. For the purposes of section 2518(a), a disclaimer shall be a qualified disclaimer only if it satisfies the requirements of this section. In general, to be a qualified disclaimer—

(1) The disclaimer must be irrevocable and unqualified:

(2) The disclaimer must be in writing;

(3) The writing must be delivered to the person specified in paragraph (b) (2) of this section within the time limitations specified in paragraph (c)(1) of this section;

(4) The disclaimant must not have accepted the interest disclaimed or any of its benefits; and

(5) The interest disclaimed must pass either to the spouse of the decedent or to a person other than the disclaimant without any direction on the part of the person making the disclaimer.

The use of qualified disclaimers should be carefully thought out, and quite frankly, should only be utilized under the supervision of an attorney or tax professional. Disclaimers can be tricky. I have heard the following horror story arise from the uninformed use of disclaimers: A man died without a Last Will. Under SC intestacy law, the beneficiaries of the estate were to be the man’s surviving spouse and his two children. The two children wanted to do the “right thing” by their mother and signed a disclaimer of their inheritance.

The problem? Well, the two children had children of their own. When you disclaim an inheritance, the disclaimed property is treated as though the disclaimant predeceased the Decedent. In this case, under South Carolina’s anti-lapse statute, the inheritance that was disclaimed did not go to the Disclaimants’ mother but instead went to the disclaimants’ children. Making things worse was that the disclaimants’ children were minors, who would have a guardian ad litem appointed for them by the Probate Court to protect their newly created property interests.

The moral of the story is that qualified disclaimers of property should only be undertaken under the supervision of an experienced estate attorney who will carefully analyze the law to determine where the disclaimed property would go after the disclaimer is made.

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation. 

I originally wrote this post last week, but for some reason it did not publish to the blog.  Anyway, a deal has been announced by President Obama between Republicans and Democrats concerning the federal estate tax. It seems that the Blanche Lincoln/John Kyl proposal is currently winning the day, with a $5,000,000.00 exemption per estate and a 35% tax rate.  I previously wrote about this proposal here.  The devil is in the details, and unfortunately details are a bit scanty at this time.  This proposal of course has to be passed by both the Senate and the House of Representatives, and there is fierce opposition at the moment from some Congressional Democrats.  There may be a provision as well to allow estates of persons dying in 2010 the option of filing an estate tax return under the 2011 law, or to elect to use the 2010 law with its carry over basis scheme, which would eliminate the possibility of litigation over the constitutionality of retroactive estate tax legislation.  Stay tuned…..

In 2009, it was inconceivable that in 2010 there would be no federal estate tax or generation skipping tax.  Now with 29 days left in 2010, it is inconceivable that in 2011 there will be a resurrected federal estate tax with a one million dollar exemption level and a 55% top rate, and a generation skipping transfer tax exemption of approximately 1.3 million dollars with a 55% rate.  The change over from 2010 to 2011 may usher in monumental changes in U.S. tax law.  The Congress continues to debate.  Will anything get done? Stay tuned.  If your net worth is anywhere in the one million dollar range, you need to be paying attention over the next few weeks.      

Attorneys can be a strange lot.  They make up terms that nobody understands seemingly for no reason.  One such term is the intentionally defective grantor trust.  What is a grantor trust? Why would it ever be defective? And why would this be done intentionally?  Good questions all.

First, what is a grantor?  Well, a grantor is the person that sets up the trust and transfers his/her assets to it.

Second, what is a grantor trust? A grantor trust is a trust that is deemed to be owned by the grantor. This is important because it is the owner who is responsible for paying and filing the income taxes.  When the trust is a grantor trust, then it is the grantor that owns the income from the trust, and gets the benefit of the deductible expenses of the trust.  This allows the trust income tax brackets to be avoided in favor of the more favorable individual income tax brackets.  A grantor trust does not have to apply for a new taxpayer identification number because the grantor’s social security number is used.

How do you know whather a trust is a grantor trust? You determine this by reference to the trust instrument itself. What does the trust say? What powers does it grant? How is it structured? When you know this, you then take a look at the Internal Revenue Code, Sections 672 through 678. These sections are commonly known as the Grantor Trust rules.  As an example, a trust that is revocable by the Grantor is a grantor trust, and we know this by reference to IRC Section 676.  A trust that allows the Grantor to amend it to add beneficiaries (other than after adopted or born children) is a grantor trust and we know this by reference to IRC Section 674.  There are many other powers that can be granted in the trust to cause the trust to be a grantor trust.

Now that we know what a grantor trust is, why would we ever set up an intentionally defective grantor trust? An intentionally defective grantor trust is a trust that intentionally contains a provision that causes the trust to be a grantor trust.  This is done in the situation where it is desirable to structure a trust in a way that allows the trust assets to not be includible in the grantor’s estate, but still taxable for income tax purposes to the grantor.

The Irrevocable Life Insurance Trust (ILIT) is an example of (Click here for more…)

There were no real Congressional debates in September on extending the Bush Tax Cuts, or what to do about the repeal and pending reinstatement of the estate and generation skipping transfer taxes.  Congressional members have left D.C. until after the midterm elections in November.  Democrats did not want to suffer a defeat on their proposals prior to the midterms, and the Republicans wanted to keep the issue alive as a talking point in the run up to Election Day. Unsurprisingly, playing politics has won out to responsibility in our tax laws.  Can this be one of the reasons it seems a majority of the American people is fed up with politics as usual?

One way or the other, we will soon have certainty on the future of the estate and generation skipping taxes.  Stay tuned……

It is reported that Senator Harry Reid had proposed debates to be held in September 2010 on the future of the federal estate tax.  It seems to me that the Democrats hold the leverage at this point, with the Republicans more inclined to give in on their side in order to avoid the automatic reinstatement of the federal estate tax at pre-EGTRRA levels, ie, a one million dollar exemption per estate with a maximum tax rate of 55%.  However, with the midterm election looming and uncertainty as to the future constituency of the Congress, I doubt that any actual legislation will be announced in September.    

President Obama’s 2011 proposed budget assumes that the estate tax law will include a three and a half million dollar exemption per estate with a maximum rate of 45%.  It will be interesting to see where the law stands on January 1, 2011.  I will post at midnight on January 1, 2011 to let you know.  Stay tuned…..