Cedar Point Estate Tax Ride!

Summer
time is big at Cedar Point, in Sandusky,
Ohio, has long been known as the
haven for roller coasters, more than any other park in the world. Rides like
the “Disaster Transport,” thrill visitors. Their website describes the ride: “Take
a journey into the unknown! Disaster Transport takes you through time and space
– and in complete darkness!” Tell me doesn’t that sound like a description of
the state of the estate tax. Double dare ya!

Wherever You Go, There You Are

Mindfulness and tax planning: Repeal; Retroactive
reinstatement; $1 million exclusion next year… Wherever you go for estate
planning, there you are…confused. Well, there is no estate tax today, we’re
living under the so called carry over basis regime under which assets held on
death are not subject to the estate tax. The quid pro quo is that the tax basis
(investment) in assets is not increased at death but retains the same tax or
cost basis as the decedent had. There are a host of complex exceptions to this
that permit a limited amount of appreciation to be eliminated (i.e., a step up)
at death. In simple terms, $1.3 million of appreciation on any estate plus $3
million on property passing to a spouse. A detailed analysis of these rules can
be found on www.shenkmaneducation.com in a white
paper initially published by www.leimbergservices.com.
While everyone was convinced that the absurdly complex carry over basis rules
would retroactively repealed, the same everybody was positive that we’d never
have estate tax repeal. So much for positive thinking!

Roller Coaster Tax Bills

The Rolling Thunder roller coaster at Six Flags is a
dual-track wooden roller coaster with a nearly 8- story drop and 10 great hills.
Kids stuff. Consider these drops and hills: The estate tax exemption in 2001
was $675,000. It rose up hill to a whopping $3.5 million in 2009, then a drop
to oblivion in 2010 with repeal (try to beat that Six Flags!) and now a
cliffhanger of potentially $1 million in 2011.  Boy, depending on when you checkout what the
kids get will vary dramatically. The federal estate tax on a $4 million estate
in 2009 would have been about $225,000. If the kids kept you on the respirator
until 2010 the tax would be zip when you code [sorry!]. If the kids forgot
about you too long and you squeaked into 2011, the tax on the same $4 million
estate would nearly hit $1.5 million in 2011.

Food Court Fun

After a wild morning on the roller coasters, its time
to hit the food court for some refreshments to get you through what a taxing
afternoon might bring. What might you do not knowing what’s around the next
bend?

GRATs. Gifts to grantor retained annuity
trusts have received so much press that we won’t belabor them here again but
suffice to say that most advisers believe that this technique will be restricted
significantly in the near future (perhaps before you read this!). So if GRATs
are on your planning menu, eat quickly! Consider whether there is an advantage
to you to using a longer than two year GRAT to lock in today’s low interest
rates.

Crummey Gifts. Gifts to trusts are often structured
so that the beneficiaries have a right to withdraw the money for a brief period
of time. This enables the gift to qualify for the annual gift tax exclusion,
$13,000 this year. There are some rumblings about Crummey’s being restricted so
consider maxing out on their use while you can.

Gift of Property. Gift the vacation home to your kids to
get it out of your estate. So your condo on the
beach is worth about ½ of what it was a few years back so perhaps you give
that away to the kids. ◙ If the gift
won’t exceed what remains of your million dollar gift exemption that might be a
shrewd move. ◙ Even if it
does, paying gift tax at 35% might itself be tax beneficial if the estate tax
rate in fact climbs to 55% next year. But what if your estate is worth $4.5
million? If the estate tax exclusion is $1 million next year getting the condo
out of your estate might be looking good, especially if it appreciates in value.
However, if Congress gooses the exclusion up to $5 million you’ll might have possibly
paid a gift tax to save an estate tax that no longer applies to you. That’ll
leave you with the same feeling as a ride on the Corkscrew (that’s three
inversions!) after a Big Mac at the food court. ◙ The focal
point shouldn’t be the decline in value, that’s history. Will the condo
appreciate post-gift? That will depend not only on inflation generally but the
sales overhang for similar properties. If your resort area has hundreds of
depressed vacant condos on the market, getting the condo out of your estate at
a value less than what it was worth a few years ago may not be a winner since
it may take many years for the market to recover and the property to
appreciate. ◙What
about probate and domicile? If you gift away a vacation condo in another state,
that might save your heirs the cost and hassle of probate in that state. But if
it’s a close call as to whether you may qualify as domiciled in that other
state, gifting away the condo might undermine your ability to claim domicile
there. That could have a far more costly impact.  ◙Giving away a condo is not quite as simple as writing
out a check. You’ll need a deed prepared by counsel in that state. There may be
transfer taxes, estimated or withholding taxes, etc. depending on state law. ◙ If there is a mortgage you’ll need
lender approval. It might be advisable to sign a gift letter confirming the
transfer by gift. If you’re giving the condo to one kid, do you want to
equalize the other kids? ◙  You’ll have to obtain an independent written
appraisal of the value of the condo given. Your property tax bill don’t cut the
mustard. ◙ You will
probably have to file a gift tax return for this. ◙
The property will have carryover basis so if your kids later sell it
they’ll pay capital gains on the excess of the sales proceeds over what you
paid. If capital gains increase enough that could offset much of the perceived
tax benefit.

Split-Dollar Life Insurance Loans. If you
loan $1 million to your daughter’s insurance trust so that it can buy life
insurance on your daughter’s life, how does that help your estate? Split-dollar
life insurance loans, under Treasury Regulation §1.7872-15(d) might just
provide that unexpected thrill when you thought the ride was nearly over. The
split-dollar loan can accrue interest and mature on the death of the child/insured.
Both the borrower and the lender must sign a written representation. This must
be included with their tax returns filed not later than the last day (including
extensions) for filing the Federal income tax return of the borrower or lender,
whichever is earlier, for the taxable year in which the lender makes the first
split-dollar loan under the split-dollar life insurance arrangement.  ◙ The estate tax vig might come from the determination
of what the fair value of the loan is in parent’s estate on death. If daughter
is age 40 and mom age 84, on mom’s demise her estate will hold a loan that pays
no interest or principal until daughter’s death when the insurance policy pays.
 ◙  What is a
reasonable market based rate of interest would be as of the valuation date? ◙
What will the present value of the split-dollar note be? ◙
Given the estate tax uncertainty, if the few plays out differently the
loan might be repaid to unwind the loan transaction.

Beneficiary Defective Inheritor’s Trust (BDIT). The key to
the BDIT is that someone other than you sets up the trust to benefit you. If
mom establishes your trust and makes a $5,000 gift, and you never gift to the
trust, you may have more flexibility to be a beneficiary and trustee of the
trust as compared to the more common grantor trust arrangement. For example, if
you gave gifts to fund the  trust and
retained rights to enjoy the assets transferred, the full value of those assets
will be included in you estate. The BDIT uses the annual Crummey power in your
favor to make the trust a grantor trust for income tax purposes as to you, even
though mom was the settlor. This structure permits you to sell assets to the
BDIT a still depressed prices, for a note at today’s still historically low
interest rates, be a discretionary beneficiary of the trust (with an
independent preferably institutional trustee making distribution decisions),
yet freeze the value included in your estate in case the $1 million exclusion
becomes a reality.

Conclusion. Taxpayers considering estate planning should wear
Nike’s “Just Do It!”