In This Issue

• Hackl Decision Affirmed
• Ohio Legislative Checkup
• 2001 Tax Act Update

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Ohio Legislative Checkup

By Mark R. Reitz

Governor Bob Taft recently signed two pieces of legislation affecting the estate planning, trust and probate practice. The exact application and extent of use of these legislative changes is still to be determined. However, the Ohio Legislature appears to continue to authorize and approve planning techniques that clarify probate court jurisdiction and minimize its involvement.

The first piece of legislation is Substitute Senate Bill 64, effective on October 21, 2003. This legislation clarifies some of the changes to the ability of a probate court to terminate small trusts. In 2002, the Ohio Legislature authorized the probate court to terminate small trusts valued at less than $100,000 (an inflationary adjustment from the previous amount of $50,000). Termination must still be predicated on the fact that ongoing administration of the trusts has become burdensome; that the money available for distribution to beneficiaries is continually reduced; and that termination is fair, practical and does not frustrate the overall intent of the grantor. The 2002 legislation did not, however, give instructions on how to fairly and equitably distribute the trust proceeds upon termination.

The new legislative amendments clarify that distribution of proceeds shall be ordered as provided in the trust instrument. If no provision is contained in the instrument, distribution shall be ordered among the beneficiaries in accordance with their respective interests, as determined equitable. In making this determination, the probate court is required to consider any agreements between the beneficiaries, actuarial values of the beneficial interests and any preferential expressions contained in the trust instrument.

This legislative change offers guidance to the probate courts in addressing the various beneficial (and sometimes conflicting) interests that arise when terminating a small trust and ordering a distribution of proceeds.

The more sweeping change contained in Substitute Senate Bill 64 specifies that a grant, appointment, or authorization to a spouse to act under a "power of attorney" will be revoked by the termination of marriage.

Ohio Revised Code §1339.621 now provides, in essence, that if after executing a power of attorney, the principal and the principal's spouse are divorced, obtain a dissolution or annulment or enter into a separation agreement, the designation of the spouse or former spouse as attorney-in-fact is revoked, unless expressly provided otherwise and even if the couple subsequently remarries. It appears the legislative intent was to carry into effect the general principle that once divorced, all legal authority to conduct transactions on behalf of the ex-spouse should be terminated.

The third legislative change of Substitute Senate Bill 64 is a technical change to general fiduciary law governed by Chapter 1339 of the Revised Code. The legislative amendments specify that a spendthrift provision in a trust will not cause a forfeiture or postponement of a property interest qualifying for the Federal estate tax marital deduction or the Ohio qualified terminable interest property ("QTIP") deduction. Also, an amendment was made clarifying that an instrument creating a testamentary or inter vivos trust shall not require or permit the accumulation for more than one year of income qualifying for the Federal estate tax marital deduction or the Ohio QTIP deduction. These sections, however, shall not apply should the testator expressly state that obtaining the marital or QTIP deduction is less important than enforcing the spendthrift provision or permitting the accumulation of income.

The second piece of legislation affecting the estate planning, trust and probate practice is Amended House Bill 72, which becomes effective on October 29, 2003. This legislation permits the execution of a declaration for mental health treatment ("DMHT") specifying preferences or instructions regarding mental health treatment, if and when determined necessary. The specifics of the declaration for mental health treatment are beyond the scope of this article but, in general terms, it provides that an adult who has the capacity to voluntarily consent to treatment may execute a DMHT to avoid disputes about what treatments should be provided.

The DMHT shall not revoke a valid durable power of attorney for health care, but supersedes such power of attorney with regard to mental health treatment. The DMHT remains valid for 3 years unless revoked, and, once operative, it is effective until the declarant has the capacity to consent to mental health treatment. The DMHT may be renewed once, extending the validity of the declaration for an additional 3 year period (but no changes to the terms or provisions shall be permitted).

This author speculates that the DMHT legislation was passed as a concession between government and mental health services lobbyists in order to insure that all individuals, including those with mental illness, have the right to choose treatment options in their best interest. The extent, use and practical applicability of the DMHT is yet to be determined

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2001 Tax Act Update

By Charles J. Kegler

On June 7, 2001, President Bush signed The Economic Growth and Tax Reconciliation Act of 2001 (the "Act"). In prior Newsletters, we described the Act in detail, including the increase in the Federal estate tax applicable credit amount to $1 million for 2002 and 2003; to $1.5 million for 2004 and 2005; to $2 million for 2006 to 2008; and to $3.5 million for 2009. We also described how the Act repeals the estate tax in 2010 but reinstates it in 2011.

Meetings with clients over the past two years have generated a number of questions. Some of those questions and our recommendations include the following:

1. What Are the Chances that President Bush Will Succeed in His Attempts to Permanently Repeal the Estate Tax?

   Tax commentators and political experts have various guesses on the likelihood of permanent repeal. The only certainty is uncertainty. In June 2003, President Bush was successful in getting a bill passed in the House of Representatives that would permanently repeal the estate tax but, to date, has been unsuccessful in gaining Senate approval.

2. Because Changes in the Estate Tax Law Are Phased in Over the Next 7 Years, Why Should I Review (and Potentially Revise) My Estate Plan Now?

   There are several reasons to review and potentially revise your estate plan now rather than waiting for the changes to take effect:

   1. If you have Marital Deduction Trusts (often referred to as "A-B Trusts"), the Act will dramatically affect the operation of the trusts by increasing the funding of the Credit Shelter Trust (also referred to as "Trust B"). Depending on the size of the estate and the terms of Trust B, this increase in the funding of Trust B may not be consistent with your goals.

   2. The Act eliminates estate taxes for just one year - 2010. For many with A-B Trusts, it is not clear what proportion of assets would be allocated to Trust B should death occur in 2010. When the estate tax is repealed a likely interpretation is that the entire estate would be allocated to Trust B. Such allocation may not be consistent with overall goals, particularly if the surviving spouse is given only limited rights (and sometimes no rights) in Trust B.

   3. If you wait to make changes to your estate plan, there is always the risk that, despite best intentions, you will fail to amend the plan or be unable to amend the plan because of health or other reasons.

3. How Will the Act Affect My Plan?

   A number of factors will contribute to how the Act affects your estate plan, including the size of your estate and terms of your present estate plan. For example,

   1. for clients whose combined estates are less than $1 million and who anticipate that their estates will never be larger than $1 million, in most cases, the Act eliminated Federal estate taxes for such estates beginning in the year 2002; or

   2. for clients who have A-B Trusts, the Act could dramatically affect the operation of the trusts.

4. I Presently Have an A-B Trust That Reduces Federal Estate Taxes Under Present Law. If the Act Eliminates Estate Taxes, Should I Revoke My A-B Trust?

   Whether it makes sense to eliminate an A-B Trust depends on the size of your estate and your non-tax goals as illustrated by the following examples:

   1. If a married couple has a combined estate of less than $1 million and anticipates their combined estate will never exceed $1 million, the couple may not need to continue using A-B Trusts to eliminate Federal estate taxes. However, there may be other reasons to continue using the existing A-B Trusts, such as avoiding probate by funding the trusts during their lives, creditor protection for the surviving spouse and family, providing professional management of assets for a surviving spouse, and providing professional management and deferral of distributions for children on the death of the surviving spouse.

   2. As described above, although the estate tax is eliminated in 2010, it is reinstated in 2011. Thus, for many married couples, continuing the flexibility provided by their A-B Trusts makes great tax sense and family sense.

5. Does the Act Eliminate the Need to Use More Sophisticated Estate Planning Techniques Such as Discounted Gifts Using Family Limited Partnerships, Grantor Retained Annuity Trusts, Qualified Personal Residence Trusts, and Other Estate Freeze or Family Succession Planning Techniques?

   Many commentators believe that the Federal estate tax will never be repealed, but, instead, that the estate tax credit will be increased to an amount greater than $1 million (which is proposed to be reinstated in the year 2011). For example, many commentators believe that the ultimate estate tax applicable credit amount will be at least $2 million, or a total of $4 million for a married couple. Accordingly, if a married couple has a combined estate that exceeds $4 million or anticipates the estate may exceed $4 million, more sophisticated estate planning techniques continue to make great tax sense and personal family planning sense.

6. What Is the Most Efficient Way to Review (and if Necessary, Amend) My Estate Plan?

   We find that the most efficient way to review the operation of estate plans, as well as the most efficient way for advisors to make recommendations with respect to changes in plans, is to first provide advisors a current financial statement. With that current financial statement, we prepare charts illustrating the operation of your existing plan based on the current values of your estate. We find that it takes substantially less time for you to review your plan and understand the operation of your plan if you have a picture or chart showing how the plan works. We also find that most clients prefer looking at a picture or a chart than reviewing the detailed will and trust that implement the plan.

7. If My Estate Plan Needs to be Amended, What Will it Cost?

   The cost to amend estate plans depends on a number of factors, including the complexity of your assets, the complexity of your estate plan and the strategies necessary to satisfy your goals. For example,

   1. for some, it may not be necessary to make any plan changes;

   2. some may choose to revoke their existing plans and implement a new plan that is more simple than the existing plan;

   3. for some, minor modifications to existing plan documents may be all that is needed; or

   4. other clients may choose to completely restate their plans.

8. I Purchased Life Insurance to Pay Estate Taxes. If the Estate Tax Is Going to be Eliminated, Should I Cancel My Life Insurance?

   Although the Act eliminates estate taxes in the year 2010, the estate tax is reinstated in the year 2011 with a credit amount of only $1 million. Accordingly, life insurance may still be a very important part of your estate tax planning strategy. Additionally, life insurance may be necessary for your family for reasons other than the payment of estate taxes. In short, we recommend that you make no decision with respect to life insurance without taking into account your overall estate plan.

9. A Friend Told Me that My Spouse and I Should Own All Our Assets in Joint and Survivorship Form or in Some "Payable on Death" Form to Avoid Probate. Does the Act Change That Advice?

   Spouses who have all their assets owned in joint and survivorship form or payable on death form may negate the tax advantages of an A-B Trust because the surviving spouse will receive the assets outright rather than having the assets pass to the A-B Trust. We caution you to be sure to have title to your assets structured in such a way that enables you to take advantage of the tax benefits afforded by your A-B Trusts.

   Additionally, if a secondary goal is to avoid the probate process, there is a simple way to attain that objective: by transferring assets to your A-B Trust during your lifetime, you may take advantage of the tax savings associated with your A-B Trust while retaining the flexibility to use the assets as you choose during your lifetime.

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