A Concern of Duration

One of the biggest concerns of the New Estate Tax is the fact that it is only valid through the end of 2012.  If Congress and the President take no further action, the tax and gift tax law will revert to the former law which allowed lower estate tax and gift tax exemptions of only one million dollars.  Moreover, there is no guarantee that a newer law will not disregard the newly introduced “spousal portability” provisions.

A Brief Overview of Spousal Portability

So what exactly is the new “spousal portability” law contained in the New Estate Tax Law?  For the purposes of this article, “spousal portability” can be summarized as follows:

The spousal portability law doubles the amount of the surviving spouse’s available estate tax exemption without having to create a special “family” or “bypass” trust prior to the first spouse’s death.  In short, the surviving spouse can receive all of the remaining estate and gift tax exemption of his or her deceased spouse.  The unused estate tax exemption of the deceased spouse is available for use by the surviving spouse at death; and the remaining gift tax exemption is available to the surviving spouse during his or her lifetime.

What does that all mean?

The surviving spouse can now pass up to ten million in assets, upon the surviving spouse’s death, estate tax free.  However, as with most tax planning matters, the increased spousal amounts for gift and estate tax issues is not automatic.  The executor of the deceased spouse’s estate must file a properly drafted estate tax return, typically within nine months of the death of the first spouse.  If this estate tax return is properly filed, the surviving spouse can pass up to ten million dollars, estate tax free, although the exact amount will very from estate to estate depending on the beneficiaries of the deceased spouse.  The full ten million dollar estate tax exclusion may not be available to all surviving spouses.

Under the prior law, neither the gift exemption nor the estate tax exemption of the deceased spouse could be used by the surviving spouse.  However, under that prior law, trusts could be used to “shelter” or “bypass” assets of the first spouse to die, as a method of increasing the amount of protected assets up to $10 million.  In order to accomplish this under the prior law, the married couple would have to engage in proactive planning to segregate those assets at the death of the first spouse and set up a “shelter” or “bypass” trust.  That bypass trust would hold assets outside the surviving spouse’s estate upon the surviving spouse’s subsequent death.  In short, these assets held in the “shelter” or “bypass” trust would not be counted in the surviving spouse’s taxable estate at death.   The “shelter” or “bypass” trust operates the same way under the current New Estate Tax Law.

Proactive Planning under the New Estate Tax Law

There is a commonly held misconception that the New Estate Tax Law eliminates the need to create a special trust, such as a “shelter” or “bypass” trust to preserve assets and maximize the amount of assets that can pass estate tax free on the surviving spouse’s death.  If fact, there are several significant reasons for proactive planning despite the existence of spousal portability in the New Estate Tax Law.  A number of those reasons are detailed below.

Expiration of the New Estate Tax law

The spousal portability is only available until the end of 2012 under the current New Estate Tax Law.

Possible Future Changes in the Law

Will there be a new different law that does not recognize spousal portability in the future?  With the current environment in Washington, speculation about possible outcomes is difficult at best and could certainly prove very costly.  Congress and the President could eliminate spousal portability entirely, or they could make adjustments or changes that would reduce the benefit of spousal portability.  The use of a “shelter” or “bypass” trust, funded at the death of the first spouse to die, would lock in the estate tax exemption of assets placed in this type of trust, thus eliminating future estate tax on the assets held in the “shelter” or “bypass” trust.  Use of the “shelter” or “bypass” trust eliminates the concern of possible future changes in the spousal portability law.

Inflation and Asset Appreciation

The New Estate Tax law indexes the estate tax exemption for inflation beginning in 2012.  However, there are three problems with relying upon this for spousal portability purposes.  First, the current law expires at the end of 2012, and there is no certainty that the new law will continue to index for inflation.  Second, the spousal portability estate tax exemption is not indexed for inflation.  Third, the assets held by the surviving spouse may appreciate resulting in estate tax liability due to increases in the assets that were transferred to the surviving spouse instead of to a ‘shelter” or “bypass” trust.  The use of the “shelter” or “bypass” trust would eliminate these concerns.  The assets placed in the “shelter” or “bypass” trust can appreciate without becoming part of the surviving spouse’s taxable estate, thereby eliminating the concern of estate taxes on the assets placed into such a trust upon the surviving spouse’s death.

Creditor Protection

The spousal portability law does not provide any creditor protection to the surviving spouse.  The use of a “shelter” or “bypass” trust provides enhanced creditor protection for assets held by the trust.  This can be important, especially if there is concern that one’s assets could be lost to creditors or future claimants or lawsuits.

State Tax Laws

Will the state in which the surviving spouse lives recognize spousal portability at the time of the surviving spouse’s death?  In Wisconsin, there currently is no estate tax.  However, this may change and Wisconsin and other states may not adopt the spousal portability provisions, since the adoption of spousal portability will result in less income to states that adopt spousal portability.  The “shelter” or “bypass” trust is an accepted estate planning technique in states such as Wisconsin.

There are additional concerns with respect to overreliance on the spousal portability law that are beyond the scope of this article.  Suffice it to say that concerns and issues arise with the spousal portability law for Generation Skipping Tax (GST) issues and remarriage of the surviving spouse.  Upon remarriage, the surviving spouse may have to use the second spouse’s spousal portability amount, if the second spouse predeceases.  This amount could be less than the first spouse’s portability amount.

Advantages of Spousal Portability

There are a couple of advantages of the spousal portability law that are worthy of mention here.

First, the surviving spouse will receive a step-up in basis on eligible property in his or her name, that the spousal portability law allows for ease of use as compared to a trust, and the spousal portability law does not require any ongoing fiduciary income tax returns.  A “shelter” or “bypass” trust will require the yearly filing of fiduciary income tax returns (1041 returns).

Second, and perhaps more importantly, the spousal portability law can also help, along with other planning such as disclaimers, if there was no or limited advance planning at the time of the death of the first spouse.

Conclusion

When considering whether to create a “shelter” trust, there is no cookie cutter solution.  Each client and circumstance is unique.  At Wokwicz Law Offices, we like our clients to make an informed decision, based on a understanding of the advantages and disadvantages of (1) doing nothing, (2) funding a “shelter” or “bypass” trust or (3) taking advantage of the spousal portability law and the New Estate Tax Law.

We invite you to contact us for assistance in working through the maze of the current estate tax law and possible advance planning prior to death or after death planning.

Irrevocable Income Only Trusts must be very carefully and specifically drafted in order to shield assets from the nursing home and Medical Assistance or Medicaid.  All too regularly, Irrevocable Trusts are improperly drafted and thus fail to protect assets and fail to take advantage of tax provisions which can protect the creator and children from unnecessary taxation.  Care must be taken to ensure the trust complies both with the Wisconsin Medical Assistance, Family Care or nursing home laws, as well as complying with important tax laws.

Through proper planning and the use of a properly drafted Irrevocable Income Only Trust, we can accomplish the following objectives:

1. Protect Assets

Protect assets from the nursing home (Family Care, Medical Assistance, Medicaid, Creditors, etc.)

2. Provide Income

Allow the person setting up the trust to obtain income from the trust and to be taxed on the income just as they are now.  This is important because in many cases the person establishing the trust may have to pay less in taxes than if the trust were to be taxed on the trust income.  (At Wokwicz Law Offices, LLC, we utilize different techniques, depending upon the client’s situation, to take advantage of tax laws allowing the person creating the trust to be taxed on any trust income.  We often utilize Internal Revenue Code section 674(a) to take advantage of income tax provisions in the tax code that allows a “non-adverse” party to accumulate or direct income to the person setting up the trust.)

3. Control Trust Beneficiaries

Even though the trust is Irrevocable, it can be set up so that the creator can change who will receive the assets at death, through the retention of a “special power of appointment.”  Where appropriate, this can be a very useful feature for allowing the trust creator to change who the beneficiaries in the future.

4. Tax Basis Step-Up

Allow a tax “basis step-up” at death as if the person setting up the trust still owned the asset for tax purposes.  This is important as it can allow the children or other chosen beneficiaries of the trust to avoid capital gains taxes upon death. This is achieved by retaining the right to choose the beneficiaries of the trust even after the trust has been set up and made irrevocable.

5. Avoid Gift Tax

Avoid any gift tax on transfers to the trust.  Again, a properly drafted Irrevocable Income Only Trust will prevent the gift tax and prevent required filing of a gift tax return.

6. Retain House Tax Advantages

Preserve the lifetime home sale tax advantages for principal residences allowed to individuals under Internal Revenue Code section 121 to avoid capital gains up to $250,000.00 for a single person and up to $500,000.00 for a married couple on the sale of a principal residence.  This is important, so that if your principal house is sold during your lifetime, you will not be subject to any capital gains, as long as you meet the proper criteria.

7. Avoid Probate

The use of an Irrevocable Income Only Trust can be one of the tools utilized to help avoid probate at death.

It is important that attorneys drafting this type of trust be well versed in both the relevant nursing home laws (Medical Assistance, Medicaid, Family Care, Title 19, etc), as well as the relevant tax laws.  If the trust fails in either area, the assets of the trust could be lost to the nursing home, result in negative tax treatment, or both.

Prior planning is important to fully utilize the benefits of an Irrevocable Trust.  We encourage clients to plan ahead and not wait until it is too late to use an Irrevocable Trust.  Drafting and funding a properly drafted Income Only Trust is ideally completed at least five years before having to apply for Medical Assistance, Medicaid, Family Care and Title 19.

Please contact Wokwicz Law Offices to discuss if an Income Only Trust is the right choice for you.

At Wokwicz Law Offices, we routinely meet with our clients to plan how best to manage their expenses. This sort of review is particularly important when our clients are considering long-term nursing-home care and how to qualify for Medicaid or Medical Assistance for that care, while still protecting financial assets for loved ones.

Although gifts frequently come to mind as an option, outright gifts to children are often not the best technique to protect one’s assets. In fact, gift giving can expose assets to abuse by a greedy child or child’s spouse, or encountering creditor risks if the child is sued, is involved in an accident or runs up debt. You don’t want to lose your house or savings as a result of financial or circumstantial issues that your child may encounter.

Another common approach is to use a “life estate” plan to protect a house or cabin from nursing home costs. However, this solution often places the house in the name(s) of a child or children, which may not be ideal in certain situations.

Introducing the Irrevocable Income Only Trust

A power and flexible technique that many of our clients have utilized to protect their assets is to use a properly drafted Irrevocable Trust, known as an Irrevocable Income Only Trust or an Income Only Trust. The use of these specially drafted trusts has become increasingly popular as a tool to protect your home and other assets from nursing home costs.

While protecting one’s assets from nursing home costs, an Income Only Trust is still able – as the name suggests – to provide income to the individual establishing the trust. It also allows that same individual to qualify for Medical Assistance or Medicaid. Thirdly, Income Only Trusts go a long way to help avoid probate.

Although similar to an Income Only Trust, a Revocable Trust will not protect assets from the nursing home in most situations, because the creator of the trust retains the right to revoke the trust and thus, can receive the assets back from the trust. Accordingly, an Irrevocable Trust is a more secure tool in protecting assets from a nursing home, specifically because it is irrevocable.

In order to qualify for nursing home protection, an Irrevocable Income Only Trust cannot allow the person setting up the trust to receive the principal asset back from the trust “for any reason”. Still, that person can receive income from the trust. By transferring assets, such as a house, cabin, stock, or bank accounts to an Income Only Trust, the one who established the trust can still use the house and receive income from stock and bank accounts. Meanwhile the assets will still be protected from the nursing home.

Irrevocable Income Only Trusts can be very useful tools to keep your assets protected while allowing you the income and access to nursing home care that you need. Please check back in two weeks for our overview of some important details of Irrevocable Income Only Trusts.

We welcome you to contact Wokwicz Law Offices to discuss if an Income Only Trust is right for you. Our skilled and experienced attorneys look forward to your call.

The new Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (TRA) modifies the estate tax for the years 2010, 2011, and 2012. Specifically, it puts in place an estate tax system for those who died in the 2010 tax year which allows for the election of the rules under the previous Economic Growth and Tax Relief Reconciliation Act of 2001, or to allow a new estate tax law to apply. Therefore, where that person died in 2010, that deceased person’s estate or trust may have the right to choose if the old law or new law applies to his or her estate.

This is a unique opportunity for the fiduciaries of estates and trusts of decedents who died in 2010, to elect to follow the law which is most beneficial to their estate or trust. Normally, but not always, decedents with estates of less than $5 million will prefer to choose the estate tax in order to receive the full “step-up in basis” rather than electing out of the new estate tax law to the “carry over basis” system. This can be important depending upon the size of the estate and for other matters, such as if the decedent owned a life estate in property.

Of course, other considerations will have to be given in deciding which law to apply as there are no “hard and fast” rules to apply – each case must be considered separately and on its own merits. Accordingly, each estate or trust should be closely examined to determine the most advantageous law to apply.

For deaths occurring in 2011, the applicable exclusion amount determined by the applicable credit is $5 million. Beginning in 2012, this amount will be subject to increase for inflation, with the next adjustment rounded to the nearest $10,000 amount.

Although the new TRA law simplifies estate tax planning in the near term, it certainly complicates planning over the long term. The primary reason for this complication is that the TRA law is set to “sunset” on December 31, 2012. The possibility of a new estate tax – at much lower exclusion amounts – may warrant estate planning of a more proactive approach.

For most estates and trusts, the new $5 million exclusion amount means that the estate tax is not likely not be a major concern, at least until 2012, when we may have a new estate tax law or, upon the sunset of the TRA.

At Wokwicz Law Offices, LLC, we can help you regardless of the size of your estate. We work with individuals of varying degrees of wealth, and will work hard to create an estate plan that is right for you and your situation. Please contact us to discuss your estate plan.

By no means the only way to avoid probate, the Revocable Living Trust is often the best way to do so. Through the use of a Revocable Living Trust you can determine who will be in charge of your affairs during your life and following your death. Normally, you will be the trustee and remain in charge of your affairs — unless you become incompetent. Moreover, you will be able to effect changes to the trust or reclaim assets from the trust at anytime, provided that you are still mentally competent. After you die, and unless the trust provides otherwise, the Revocable Living Trust becomes Irrevocable and the provisions as you set forth during your lifetime will be followed.

In addition to avoiding probate, a Revocable Living Trust can allow your trustee to assume control of the trust, should you become too sick to manage your own financial affairs. A Revocable Living Trust can help keep your financial affairs private, can possibly reduce estate taxes, attorney fees and costs, as well as protect your assets for other beneficiaries such as children and other loved ones. A Revocable Living Trust may also shorten any potential delay in distributing your assets after you pass away.

A Revocable Living Trust, however, will not protect assets from a nursing home. If your goal is to protect assets from a nursing home, an Irrevocable Trust or other Elder Law estate planning options are more likely to provide the safeguards you seek.

Wokwicz Law Offices, LLC welcomes the opportunity to discuss your estate plan and to determine if a Revocable Living Trust is right for your unique situation. We have a great deal of experience in estate planning, having crafted thousands of estate plans for our Kenosha-area clients, helping them avoid the cost, time and headache of probate. Please contact us if we can be of service.

Federal Estate Tax returning to pre-2001 levels?

Another question is will Congress and the President act quickly enough to prevent the return of the Federal Estate Tax to its pre-2001 levels? Although it is possible that the Federal Estate Tax could return to the pre-2001 limits, it appears that a tentative agreement could increase the limits for 2011 and 2012,with a lower 35% tax rate. Make sure you are prepared and ready to act, regardless of what the outcome is in Washington.

“Carry over basis”

Although there is no estate tax for 2010, at least as of now, there was a little known “carry over basis” tax system in place for 2010 in lieu of the Federal Estate Tax. This system treats the basis of some property for deceased individuals like that of a gift, i.e., a “carry over basis.” This “carry over basis” system has important ramifications for many trusts, estates, life estates, and marital basis allocation plans. Although this can be complicated, there are important actions that may need to be taken for people who passed away in 2010 and for the heirs and beneficiaries of people who passed away in 2010, depending upon the size of the deceased persons estate.

Ongoing uncertainty

Uncertainty exists to whether the Federal Estate Tax will be retroactively reinstated for 2010, but it appears more and more likely that it could be reinstated retroactively, with a choice of choosing the 2009 estate tax law or the 2010 estate tax law. Check back in the coming weeks for an update as to any progress made with respect to the Federal Estate Tax. We will keep you updated on the changes, good and bad, with respect to the Federal Estate Tax, including how it may affect Wisconsin and Kenosha area residents.

Please do contact us if we can be of assistance or if you have questions.

Attorney and Owner of Wokwicz Law Offices, LLC, Paul B. Wokwicz, expressed his pleasure at Kirsten’s arrival at the firm:

We’re very pleased to have someone of Kirsten’s experience and skill in the office. We know that she will be of great assistance in enabling us to continue to deliver the level of professionalism and attention to detail that our clients have come to know and expect from us.

Ms. Gargas will work with us and our staff in providing superior legal services to all of our probate and trust administration clients, including tax preparation. She is committed to our philosophy of treating each client’s needs with the individual and unique attention that they deserve, and treating each client with respect.

We continue to receive strong positive feedback from out clients on Tim’s superior and aggressive handling of their accident, personal injury and medical malpractice cases. Tim and his staff aggressively represent our clients injured due to the negligent conduct of others.

As our practice is focused on Estate Planning, Wills, Trusts, Powers of Attorney, Probate and Trust Administration, we work with co-counsel to better serve our clients’ car accident, personal injury, and medical malpractice injuries, as well as wrongful death cases. This allows us to focus our attention, expertise and time on estate planning and administration matters, while we utilize one of the top accident, personal injury, medical malpractice and wrongful death attorneys in the Kenosha, Racine, and greater Chicago areas when the need arises.

Mr. Whiting has won millions of dollars for his injured clients and is rated as one of the top 100 personal injury attorneys in Illinois — and continues to represent our clients in both Wisconsin and Illinois.

Please contact us for all of your accident, personal injury and medical malpractice needs so that we can help you obtain the best representation available for your case. We can provide a free case consultation and there is no fee unless we win.

Since results matter, contact us.

Although Paul had never actively ran before this year, he spent his evenings and some early mornings preparing by running around Kenosha and Pleasant Prairie. His primary goal was to finish the Chicago Marathon, which he did.

For 2011, Paul’s first goal will be to finish the Wisconsin Half Marathon in Kenosha, in May. His second, and more daunting, goal is then to finish the Chicago Marathon in the top half of all runners. So if you see him out running, please wish him luck!

And, if you have any advice for running in winter in Wisconsin, in or near Kenosha, please feel free to email or call Paul with your tips.

Many of the provisions will be helpful in obtaining the consent of banks and other organizations in the acceptance of properly drafted Power of Attorney documents. In addition, sanctions can result against the institution, bank or broker, if an attorney properly drafts and certifies the Power of Attorney but an institution refuses to accept the documents for reasons such as the “document is too old” or not on the institutions “approved” form.

There are also many other changes that can effect how a Power of Attorney is interpreted, including the powers of co-agents, a spouse’s powers in the event of divorce, the durability of the Power of Attorney, and a domestic partners rights. It is important that your attorney is up to date on all of the provisions contained in the new Chapter 244.

Our experienced and knowledgeable attorneys can help you review your old Power of Attorney and update or create a new Power of Attorney if necessary or advisable. For a review of your Power of Attorney or to create a new one, or for a general review of your Estate Planning, please contact us.