In This Issue

• The 2001 Tax Act — Now What?
• To Fund or Not to Fund?
• Clarity in Will Drafting Re-Emphasized

The 2001 Tax Act — Now What?

By Erika L. Haupt

In June, we provided you a short summary of the effects on estate, gift and generation-skipping transfer taxes as a result of The Economic Growth and Tax Relief Reconciliation Act of 2001 (the "2001 Act"). The timeline chart provided at the end of this article further summarizes the effects. We find clients prefer a one-page illustration of complicated concepts over pages of narrative, and the 2001 Act is very complicated.

Numerous articles and essays have been published since June attempting to explain the 2001 Act, predict changes and revisions over the next 10 years, and give odds on whether the estate tax will really be repealed. The only definitive point in each of those articles and essays is that anyone with an estate of $1 million or more should review what they have in place now to make sure it meets their goals and is flexible enough to respond to the changes ahead.

Many clients wonder what's so hard to understand. Basically, the estate tax credit is going up, the top rate is going down and the estate tax is repealed in 2010. Unfortunately, the devil's in the details. As the credit increases (and keep in mind that the gift tax credit will not increase with the estate tax credit), the amount allocated to Trust B (also known as the credit shelter trust) of a standard estate tax plan will increase. Do you want to tie up that much in Trust B for the surviving spouse? If you did not include your surviving spouse as a beneficiary of Trust B when the credit was $675,000 (for example, only your children are beneficiaries of Trust B and your spouse is the beneficiary of Trust A), should you add the survivor as a beneficiary when the credit is $3.5 million? If you don't make that clear now, you could cut out the surviving spouse as a beneficiary of all or a substantial part of your estate.

As the 2001 Act is currently written, the estate tax is repealed in 2010. However, the entire 2001 Act contains a "sunset" clause, which states that the 2001 Act does not apply after December 31, 2010. Therefore, unless Congress changes the law in the meantime, on January 1, 2011, the law we had before the 2001 Act comes back into effect (estate tax rates as high as 60% and a credit of $1 million indexed for inflation). Obviously, Congress will do something to avoid the sunset clause. Whether it will be an indefinite repeal or a freeze of the credit and rates prior to repeal is uncertain. What is certain is that documents should be revised well in advance to allow for flexibility to handle the changes.

What's the rush? Why not visit your attorney every time the credit goes up? Well, although we recommend that you revisit your plan every 3-5 years, most clients have better things to do with their time and money than meet annually with their attorneys to keep up with moving targets. And, although we hate to think about it, circumstances could arise that make it impossible for you to change your documents. If you become incompetent, your revocable trust becomes irrevocable and your family is stuck with what you thought was appropriate at the time you executed the documents. Say, for example, that it was a great idea to pass all of Trust B directly to your children in 2001 when the estate tax credit was $675,000 and your estate was $3 million. You thought your spouse could live comfortably on the remaining $2,375,000. If the same plan is in place in 2010 when the credit is $3.5 million and your estate is $4 million, your children get $3.5 million and your spouse gets $500,000. Addressing those possibilities now and building flexibility into your plan can avoid costly surprises later on.

As one commentator noted, Americans can be assured of one thing: the coming years will be rife with uncertainty about estate taxes. We strongly encourage you to define goals for your family, review your current documents in light of potential changes and develop a plan that will grow with you and with the 2001 Act —whatever its effects. Now is the perfect time to take inventory and clean house.

	The Economic Growth and Tax Relief Reconciliation Act of 2001: Estate, Gift and Generation Skipping Transfer Tax Changes
	(Adobe Acrobat PDF - requires the free Acrobat Reader)

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To Fund or Not to Fund?

By Kathy L. Swihart

You've just left your attorney's office where you, and perhaps your spouse, signed wills and revocable trust agreements. Now what? You have a trust, but is there anything in it? Is it "funded?"

Your trust is funded when you actually transfer the legal title of your real or personal property from your individual name to your trust. You may fund your trust at any time during your life, or at your death. In many estate plans, the trust is not funded until the grantor's death. Typically, the grantor, in his or her last will and testament, directs that estate property is distributed to the trustee to be administered under the terms of the trust. This is known as a "pour-over" will.

If you have a pour-over will, any property in your probate estate that you do not direct be distributed elsewhere will be transferred to your trust. However, not all of your property will necessarily become part of your probate estate. Assets that are held jointly with rights of survivorship, or that are payable on death to a named beneficiary such as life insurance proceeds, accounts with a "POD" designation or retirement plan benefits, will pass directly to the joint owner or the beneficiary. These assets are not part of your probate estate, and will not be transferred to your trust by way of the pour-over will. As a result, they will bypass your trust altogether.

Spouses commonly hold real estate and bank accounts in survivorship form and name each other as the primary beneficiary of life insurance proceeds and retirement accounts. In many cases, it is important to change such designations to take full advantage of tax planning associated with "A-B" or "credit shelter" revocable trusts. Be sure you know how your assets are held, and discuss with your attorney which assets should pass to your trust and which assets, if any, should pass directly to another beneficiary.

A. No Tax Benefits To Lifetime Trust Funding

There are different views on whether you should take the additional step to actually fund your trust during your life. There are no tax advantages to funding a trust by way of a pour-over will, and many people are simply more comfortable keeping title to their property themselves. There can be certain costs associated with transferring property during life, such as the costs to prepare and file deeds to real estate. These costs can be deferred by funding your trust at your death. In addition, some people feel it may be more of a hassle to sell or otherwise transfer property from a trust than from their individual names.

B. Avoiding Probate

Although you will not save taxes by funding a trust during your lifetime and there will be costs associated with making certain transfers to a trust, there are several advantages to funding your trust now. The primary advantage is to avoid probate administration. When you die, assets that are held in your name alone, without a beneficiary designation, can only be transferred by an order of the probate court. Having a will does not avoid probate. Your will is merely your instructions regarding how your estate should be distributed. If you retain title to your property until your death, your property will not be distributed to your trust until your will has been filed, your heirs have been notified, and your executor has been appointed by the probate court.

Going through a probate administration takes some time and money. If you fund your trust during your lifetime, your assets may be distributed faster than if your estate is subject to a probate administration. You will also save some costs by avoiding the probate process, although the savings may be minimal.

C. Avoiding Probate In More Than One State

If you own real estate in more than one state, you can avoid multiple probate administrations by transferring the real estate to your trust during your lifetime. For example, if you own real estate in Ohio and Florida and die as a resident of Florida, you will be subject to a probate administration in both states. However, if you transferred your Ohio real estate to your trust during your lifetime, you would avoid an administration in Ohio because that trust interest travels with you wherever you reside

D. Privacy

Avoiding probate also allows your financial information and your bequests to remain private. Documents filed with the probate court become public record. Your executor is required to file a complete inventory of your probate assets. Therefore, anyone may see the value of your estate and who receives your assets. Your trust, however, remains private. If you transfer title to everything to your trust before you die, you will not own anything in your individual name at your death, and those trust assets will not be listed on a probate inventory.

E. Limit Statutory Spousal Share, Commissions and Legal Fees

In some states, funding your trust during your lifetime may limit the amount to which the surviving spouse is entitled by law. Generally, regardless of what the will directs, a surviving spouse is entitled to certain rights in the estate of the deceased spouse unless there is a valid premarital agreement. Those rights are based primarily on a percentage of the probate estate, although some states also take into account assets that have been transferred to trusts. The fewer assets that pass through probate, the less the statutory share of the surviving spouse.

Similarly, funding your trust may limit the amount an executor collects as commission or an attorney charges for legal fees pursuant to state law. State law generally bases reasonable executor commissions or legal fees on a percentage of the estate. Even if the court looks to the value of the trust in determining what are fair commissions or legal fees, the percentage of the value of the trust assets that the court considers is usually lower than the percentage of the value of the assets passing under the will.

F. Incompetency

Lifetime trust funding may also prevent the need for a court-appointed guardian in the event that you become incompetent. If you own property individually and you become incompetent, your family may need to request that the probate court appoint a guardian to care for you and your assets. Not only does such an appointment require additional time and expense, but a guardianship becomes public record just like a probate estate, and there are statutory limitations regarding the types of investments that guardians may make. This means that your guardian may be required to liquidate certain assets and place the funds in low-yield certificates of deposit. A trustee, on the other hand, has a wider latitude of investment choices.

It is possible to avoid the need for a guardian by granting someone durable power of attorney. However, powers of attorney are only useful to the extent that the third party relying on the power of attorney document is willing to do so. For example, bank tellers and title agencies unfamiliar with powers of attorney may question them. Also, if your agent is only authorized to act in the event of your incapacity (known as a "springing" power of attorney), there is the practical issue of how to demonstrate that you are incompetent.

Whether you should fund your trust now depends upon your unique situation. It's a good idea periodically to review how your assets are held and to discuss the objectives of your trust with your attorney, especially if your assets have changed since you established your estate plan. If you decide to fund your trust at death, make sure that the assets you want in trust do not bypass your probate estate either because they are jointly owned, or because you have designated a beneficiary to receive the property upon your death.

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Clarity in Will Drafting Re-Emphasized

By R. Douglas Wrightsel

The importance of having a will that states one's wishes in clear and unambiguous language can not be overemphasized. A recent Ohio Supreme Court decision, Polen v. Baker, 92 Ohio St.3d 563 (2001), makes this point crystal clear.

Although the will in question was drafted by an attorney, we continue to see a number of homemade wills, which almost without exception either contain ambiguities or fail to address all matters which should be covered by a will.

The attorney who prepared the challenged will obviously believed the language was clear, as did our office in representing the estate. However, some disgruntled next of kin disagreed and challenged the will.

In disposing of the residue of the estate, the will left it to five named individuals and then said "or to the survivors thereof." One of the five named individuals pre-deceased the testator, and his children claimed that they were entitled to his share. Our position was that the surviving four named individuals should receive the estate.

Because the named individuals were blood relatives of the decedent, the disgruntled heirs claimed that a relatively unused statute referred to as the Anti-Lapse Statute applied. In essence, that statute provides that if a will does not make survivorship a condition of inheriting, then a deceased blood relative's share shall pass to his or her children. We argued that the will clearly provided that survivorship was a precondition, and the Ohio Supreme Court agreed. However, two Justices on the Court disagreed and said that the Anti-Lapse Statute should be applied.

This recent Ohio Supreme Court decision simply re-emphasizes the need for careful estate planning and the preparation of documents with as much clarity as possible. No matter how clear a document may seem to some, there will always be the possibility of someone else having a different interpretation. Thus, care in the choice of words is absolutely essential.

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