Estate freezing techniques are usually used to supplement and enhance a solid gifting strategy.  Although there is no estate tax in 2010, there is still a gift tax of 35 percent.  Taxpayers are allowed to make annual exclusion gifts of up to $13,000 per done (doubled to $26,000 for married couples) without incurring gift tax.  But gifts in excess of the annual exclusion will chip away at the taxpayer’s $1 million lifetime exclusion.

Grantor-retained annuity trusts (GRATs) are popular estate freezing techniques.  GRATs are irrevocable trusts in which the grantor retains an interest that is a “qualified” interest under the Internal Revenue Code.  The grantor transfers property into the trust, which provides that the grantor will receive a fixed annuity on at least an annual basis for a number of years.  At the end of the trust term, whatever is left in the trust after the annuity has been fully paid will go to the remainder beneficiaries.  The “gift” is the theoretical value of the remainder, which is calculated using a statutory interest rate known as the 7520 rate.

GRATs are appealing in a low-interest rate environment because the 7520 rate is correspondingly low.  The value of the grantor’s retained interest is “frozen” at the value of the contribution plus the 7520 rate.  If the assets in the trust out-perform the 7520 interest rate (2.4 percent for September), the excess will be transferred to the remainder beneficiaries free of gift tax when the trust term ends.

The most aggressive GRAT strategy—and one which may soon be limited—is the “zeroed-out” GRAT.  By manipulating the amount of the retained annuity and the term of the trust, it is possible to set the GRAT up so that the value of the retained interest is technically worth nothing.  If the assets outperform the 7520 rate, all of the assets remaining in the trust at termination will pass to the remainder beneficiaries free of gift or estate tax. If the asset does not out-perform the 7520 rate, the assets are simply returned to the grantor at the end of the trust term and the grantor is in no worse position than if the trust had not been established.  Because zeroed-out GRATs have little downside and can yield big tax savings, they have become increasingly popular in recent years.

Many fear that we may be nearing the end of the era of the GRAT as an estate-planning tool.  President Obama’s 2011 budget projects almost $3 billion in savings from restricting the use of GRATs, and the Joint Committee on Taxation believes that restrictions on GRATs could raise almost $4.5 billion over 10 years.

In the current political environment, some believe that Democrats will curb the use of GRATs in order to raise revenue for other tax breaks or for spending.  And we have seen recent proposals to do just that.  For example, the Small Business Tax Relief Act of 2010 proposed by Rep. Sander M. Levin (D-MI) on July 30, 2010, would require 10-year minimum term for GRATs (compared with the current 2-year term).  Since all of the GRATs assets are included in the grantor’s estate if he or she dies within the term, extending the term from 2 to 10 years would make it much more likely that the full value of the GRAT will be subject to estate tax.  This increased “mortality risk” could curb the use of GRATs for gift tax savings.  Other bills have proposed to limit the use of zeroed-out GRATs.

If the proposals to curb the use of GRATs are ultimately successful, changes would probably not be effective until the date the proposals are signed into law.  Many taxpayers are seizing the current opportunity to take advantage of the low 7520 rate and establish GRATs before the law changes.  Others are shifting assets from existing GRATs into new ones with lower interest rates.  Those who are concerned with the reinstatement of the estate tax in 2011 should consider incorporating GRATs into their estate planning strategy.

As I explained in Estate Tax Planning in 2010, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) replaced the historic full basis step-up system with a modified carryover regime.  Under prior law, all appreciation in property that was left to someone at death disappeared.  The recipient took a basis that was equal to the value of the asset at the date of death.  Under the new Section 1022, the recipient of property inherited from a decedent will generally take a basis that is equal to the decedent’s basis in the property.  All built-in appreciation will follow the assets into the hands of the recipients.

The new Section 1022 does provide relief from the general carryover basis rule.  The estate is allowed a general $1.3 million basis adjustment for property passing to anyone and an additional $3 million basis adjustment for property passing to a surviving spouse.  These adjustments function like coupons that the personal representative can apply toward the appreciation in selected assets.  With these coupons, anyone can shelter up to $1.3 million of appreciation from taxation and spouse’s can shelter an additional $3 million.

But what if the taxpayer has more appreciation than is covered by the coupons?  Suppose, for example, that Sally inherits land worth $3 million from her grandfather in 2010, and that her grandfather inherited the land from his mother in the early 1940s.  However her grandfather’s basis is determined (and this is a real challenge in 2010), the property will likely have more than $1.3 million of appreciation.  If Sally sells the property immediately, in 2010, it is likely that most of the proceeds from the sale would be taxable.

This result may be avoidable.  EGTRRA provides that, after 2011, the estate tax laws will apply as if EGTRRA had never been enacted.  What would be the result of a sale of inherited property EGTRRA had never been enacted?  The property would get a full basis step up.  This gives Sally an argument—although it may be a stretch—that the appreciation in the property is not taxable if she waits until 2011 to sell it.  If this argument is successful, deferring sale of the property until 2011 could result in a substantial tax savings.

This puts fiduciaries, including trustees, in a precarious situation.  Fiduciaries usually sell assets to meet cash needs as soon as the needs are determined, thereby minimizing investment risk due to market volatility.  But now the fiduciary has a dilemma: If the fiduciary waits until 2011 to sell the asset, the appreciation in the property may escape taxation, but this will expose the fiduciary to investment risk due to market volatility between now and 2011.

So what should the prudent fiduciary do?  Sell now and take the risk of losing the possibility of full basis step-up, or sell later and take investment risk due to market volatility?  While there may be no easy solution, a few guidelines can be helpful. If the fiduciary needs cash but only owns highly appreciated assets, the fiduciary should consider obtaining a loan to meet imminent cash needs and deferring assets sales until things settle down in 2011.  If this exposes the fiduciary to too much investment risk, the fiduciary should consider acquiring a derivative security to hedge the risk.  If, on the other hand, there is enough 2010 basis allocation to shelter the appreciation, the fiduciary should consider selling assets immediately to raise the cash.  In either event, fiduciaries are well-advised to document everything, including the analysis that led to the decision.

Alberta O’Neill didn’t like the way Eldon and his daughter were handling the various estates.  She filed documents asking for their removal and requesting an accounting of each estate.  The court ordered the accounting, which the administrators provided.  There seems to have been some information missing, though, due to their attorney’s closing of his law practice.

The case eventually went to trial, but the court continued the proceeding to a later date.  In the interim, the parties reached an agreed order, which was approved by the chancery court.  The administrators then changed their mind and asked the court to set aside the agreed order.  The administrators claimed that the threat of criminal charges had coerced them into signing the agreed order.

The administrators’ duress claim was somewhat novel.  They claimed that the duress was caused by their attorney when the attorney gave them advice regarding the matter.  The attorney apparently informed the administrators of the possibility of criminal action, loss of job, and doomed political aspirations.  The administrators claimed that this advice created so much fear as to overcome their free will and coerce them into signing the agreed order.

After a hearing, the Stone County Chancery Court determined that the administrators had signed the agreed order by their own free will and refused to set it aside.  On appeal, the Supreme Court had to determine whether judgment was the product of duress or whether it was executed voluntarily.

Normal stress associated with signing an agreement is not duress.  For an agreement to be set aside, the duress must have been so severe as to override the volition of the party to the agreement.  Applying this standard to the case, the Supreme Court did not find sufficient evidence that the administrators were under duress when they signed the agreement.

In re Estate of Davis v. O’Neill, 2009-CA-01025-SCT (Aug. 19, 2010).  Get Full Opinion

I commented last week on a recent matter I handled that involved a self-titled estate planner without legitimate credentials.  I ran across a Federal tax case recently that drives this point home.  That case involved an “enrolled agent” who held himself out as an estate planner.  The result?  $380,000 in unpaid taxes and a $76,000 penalty that the taxpayer had to litigate in Tax Court.

The case involved the estate of Ralph Robinson.  Ralph was a self-made man.  Although he worked as a lumber mill saw filer, he had amassed an estate worth more than $1 million.  But later in his life, Ralph suffered from Alzheimer’s disease.  In 1999, he executed a durable power of attorney naming his daughter Carol as attorney-in-fact.  Carol began working with Ralph’s son James to arrange Ralph’s final affairs prior his death.

Like most people, James was not a tax guru.  He was a computer programmer without a college degree.  He had only completed a basic accounting course and had not taken any tax courses.  At the recommendation of a friend, James had hired John Schlabach to handle his own taxes.  James made this decision partly because Schlabach was an “enrolled agent.”  In the IRS’s language, an enrolled agent is:

An applicant who demonstrates special competence in tax matters by written examination administered by, or administered under the oversight of, the Director of the Office of Professional Responsibility and who has not engaged in any conduct that would justify the censure, suspension, or disbarment of the practitioner.

Between 1997 and 2007, Schlabach handled James’ personal income tax returns.  During that time, James noticed that Schlabach had added “estate planning” to his advertising.  When James asked about this, Schlabach told him that he was a “certified” estate planner who knew “how to file each and every return that the IRS has.”  Schlabach said that he routinely performed these services and could cite the Internal Revenue Code.  So when it came time to plan Ralph’s estate, James thought of Schlabach.

Ralph had wanted to minimize his estate tax liability and avoid probate (Ralph had went through a difficult probate with his brother’s estate and wanted to avoid the same in his own estate).  These objectives were conveyed to Schlabach, who recommended a living trust-based estate plan.  On Schlabach’s advice, the Ralph Kitson Robinson Living Trust was established in 2002. James and Carol served as co-trustees.

The purposes of the trust were typical of a trust-based estate plan: the trust was to receive and manage Ralph’s assets for his benefit during his lifetime and distribute the assets to his children (after paying expenses) upon his death.  Ralph’s primary residence and brokerage account were transferred into the trust.  James understood that this would not remove these assets from Ralph’s taxable estate, but that it could avoid the need to probate these assets.

Schlabach also advised James to transfer some real estate to the Alden Granville Trust.  Schlabach incorrectly informed James that doing so would remove those assets from Ralph’s taxable estate (Ralph had a retained interest in the Granville trust that triggered inclusion under Section 2036 of the Internal Revenue Code).

Ralph died in 2003 at the age of 91.  James was named as executor of his estate.  Schlabach informed James that Ralph’s estate exceeded the applicable exclusion amount (then $1 million).  To avoid estate taxes, Schlabach suggested that James transfer assets of the living trust to the Robinson Foundation, a non-exempt charitable trust that had been formed on Schlabach’s advice.  Based on this advice, James transferred $941,000 to the Robinson Foundation.

When all of this got to the IRS, the IRS issued disallowed the $941,000 for property transferred to the Robinson Foundation and included the value of the real estate transferred to the Granville trust in Ralph’s estate.  Apparently James didn’t even have a good argument to the IRS’s claims.  He conceded these issues to the IRS, resulting in an estate tax deficiency of $380,514.

But the IRS also charged an accuracy-related penalty of $76,103.  This penalty generally does not apply to the extent that there is reasonable cause and good faith on behalf of the taxpayer.  Good faith reliance on the advice of an independent, competent professional as to the tax treatment of an item may constitute reasonable cause.  James disputed the accuracy-related penalty, claiming that his reliance on Schlabach’s advice was evidence of reasonable cause and good faith.

The case reached the United States Tax Court, which ad to decide whether James really owed the accuracy-related penalty.  Lucky for James, the Court held that he did not.  The Court felt that James’ reliance on Schlabach’s advice was reasonable based on Schlabach’s representations of his own ability to James.  Accordingly, the $76,103 accuracy-related penalty did not apply.   But you have to wonder how much he spent in attorneys’ fees and court costs to reach that result.

Estate of Robinson, T.C. Memo 2010-168 (August 2, 2010).

I recently posted about the dangers of cheapskate estate planning–techniques like leaving an unrecorded deed with a family member. People usually try this type of thing to save a little in attorney’s fees, and often they spend much more in the end trying to clean up the mess.  Others don’t plan at all, often leading to the high cost of dying without an estate plan.

But I was reminded today that, as bad as cheapskate estate planning or no estate planning is, it’s not the worst thing you could do.  So what is worse than a do-it-yourself hack job that carries huge financial risks and tends to breed family conflict?  Paying an “estate planner” for a pre-packaged set of forms that leave you in the same place (if you’re lucky) but cost more than consultation with a qualified estate planning attorney.

Perhaps one of the messiest probate matters that I have had to clean up involved an estate plan that was prepared by a local Mississippi “estate planner.” He was a life insurance salesman by trade, but he had been turned on to the lucrative living trust market.  He advertised to elderly clients that he was a “notary public” and thus qualified to prepare estate plans.  What qualifies a Mississippi life insurance salesman and notary public to prepare estate plans? Absolutely nothing. It was just a title that he used to dupe older people into thinking he had some sort of qualifications for selling them over-priced trust forms.

The system that he had bought is published by the Estate Plan, a group that is sadly typical of the living trust promotion industry (their site allows folks to sign up as an “Independent Advisor”).  This company is not owned by an attorney, but by a salesman with a good story to tell (I saw the horrors of probate in my parents estate and want to help you avoid it).  These were horribly-drafted forms that didn’t fit the client’s asset profile at all.  They incorporated an unnecessary GST-trust (even though all of the assets were left to the spouse and children) and used convoluted language that was undoubtedly beyond the grasp of both the “estate planner” and the client.

Although the trust package was promoted with big promises of “probate avoidance” (with the usual exaggerations and scare tactics), it was not funded during the lifetime of the client and didn’t avoid probate at all.  In fact, it led to a costly probate proceeding that took several years to resolve.  The decedent’s spouse was not the mother of his children and wanted to keep all of the assets that she could.  The children claimed that the father intended to leave them everything.  The trust documents were so unclear that it was anyone’s guess as to what the father intended.  So this mess hit the court system, with attorneys on both sides charging hourly legal fees to straighten it out.

Perhaps worse of all is the fact that the decedent actually paid a good bit for this estate plan (if I recall correctly, more than he would have paid had he come to my office).  He did this thinking that he would avoid those costly attorney’s fees, but in the end the attorneys did get their bite at the apple.  The only difference was that he paid more attorney fees in addition to the amount that he had paid the “estate planner” to avoid those fees.

The “pay now or pay later” principle applies to estate planning: either you pay up front to plan your estate properly or you let others pay more to sort it out in the end.  I have had clients who were indifferent about what was required after their death to clean the mess up (for example, clients who didn’t have close family members).  So “pay later” can be a reasonable choice for some people.  But why would anyone choose to pay now and pay later?  That could be exactly what you are doing if you allow an unqualified individual to plan your estate.

It has been more than a year since Steve McNair was murdered on July 4, 2009. Within this last year, the only thing to be settled within his estate is a debt to a local artist for a family portrait. Without a will, it has been left up to the court to decide who is entitled to inherit from his estate.

Part of the delay has been caused by the difficulty in establishing heirs. Steve McNair died married to Mechelle McNair and had two sons with her. He also may have two older sons from two separate women that he never married. Both boys are named Steve, after their father. The two older boys cannot inherit under Tennessee law unless they prove by clear and convincing evidence that Steve McNair is their father.

Currently, it doesn’t appear that Mechelle is challenging the paternity claim from these boys.  Initially when she filed the probate paperwork, she failed to list the older boys as beneficiaries and stated that she was the surviving spouse with her two boys listed as the surviving heirs. Yet, since the initial paperwork, things seem to have been clarified and now all four boys appear to be in line to inherit.

In Tennessee, when a person dies intestate without a will, the surviving spouse will receive one-third of the estate with the remaining two-thirds to be divided among the remaining heirs. The court is left to determine who is an heir and who is not.

Had Steve McNair had an estate plan he would have been able to name whomever he wanted as a beneficiary without worrying about whether his older sons would be provided for. Without a will, the court can conclude that there is not enough evidence to prove paternity and the two older boys could receive nothing.

Over a year after McNair’s death there has yet to be a determination as to who could inherit as an heir of his estate. A date has been set for September 28, 2010, to announce who will inherit from the estate. But it is not certain if they will find out how much is left to inherit or who will receive what specifically.

However, because a year has passed and the estate has yet to be settled taxes have become due. It is reported that as the surviving spouse, Mechelle, had to pay over 4 million dollars to cover federal, state and other fees on the estate for the past year. Taxes and fees can often be avoided by creating specific instruments to pass your assets through.

Along with taxes, the heirs have also incurred mounting legal costs in dealing with unresolved estate issues. For example, Mechelle has tried to sell her husband’s interest in a restaurant, Gridiron 9, which he started with his cousin. The cousin filed to stop her from selling and the matter had to be resolved in court. At this point, the estate still holds shares in Gridiron 9, but the restaurant is currently closed and incurring rental and waste costs.

Another issue McNair failed to plan for was the future of his charity, The Steve McNair Foundation. Because the estate assets are currently tied up waiting for the court’s decision, the charity has not received any funding from McNair’s family. The foundation appears to have shut down and has not hosted an event or sponsored any community activity since September 2009. The lack of a will has cost McNair the opportunity to continue helping a cause that was very close to his heart, youth sports.

Steve McNair has died leaving an estate that is worth over 19 million; however by the time the estate is settled and distributed (which realistically could be in 2011) a huge portion could be gone. And because of the unclear and dragged out process that occurs when someone dies without having even a simple estate plan, family, friends and foundations are left with the costs piling up.

To make a long story short, the daughter wouldn’t give it back and the father (and his estate) spent more than 10 years and no-telling-how-much in attorneys’ fees and court costs.  And in the end, he lost.   The tragedy is that this could so easily have been avoided with a little estate planning.  Instead, the father had one of his daughters draw up a few deeds, probably in an attempt to save the costs of going to a qualified estate planning attorney.  We see how that worked out.

I see this all the time in my practice.  I’ll get questions like this: What if I just deed everything over to my daughter, but have her not record the deeds until I die? Won’t that avoid probate and protect the property? Sure, that’s a great idea! Just deed it to your daughter.  That way (1) if she is sued, the creditor can seize the property; (2) if she divorces, her husband may get part of the property in equitable distribution; (3) if you need the property at a later date and she refuses to reconvey the property to you, you can sue her and spend thousands in litigation in an attempt to get the property back; (4) if she dies before you, there could be multiple probate issues in the chain of title; (5) if the recording laws change in the interim (as Mississippi’s recently did), the deed may not be recordable in the future, (6) you can create a huge rift in your family that may never be healed, and (7) if any number of a bunch of other things go wrong, you’ll undoubtedly spend way more than you hoped to save by using this cheapskate estate plan.

Or, you could go to a qualified estate planning lawyer and have an estate plan that will legally and effectively reach your goals without all of this huge risk.  It will cost you a little on the front end, but think of it as insurance.  You are paying a little now to protect against the risks that something will go wrong.  And you’ll be saving your family from a potential dispute that could destroy their relationship with one another.

This also comes up with taxable estates.  As I mentioned in Estate Planning for 2010 and in recent estate tax developments, the estate tax is currently set to come back in with a $1 million exemption amount and tax rates of over 55 percent of the taxable estate.  In other words, if you have more than $1 million of assets (including real estate and life insurance), you could lose over half of the value of the assets that exceed $1 million in estate taxes.  Is it really worth trying to scrimp on a few thousand dollars worth of planning costs to risk hundreds of thousands of dollars of estate taxes?

I know this sounds self serving.  But this really isn’t an attempt to hawk my services.  I have seen the disasters of do-it-yourself estate planning time and again.  In fact, I often get paid to clean them up.  With cheapskate estate planning, you get what you pay for and you pay for what you get.

Over the past few months, I have highlighted the role that confidential relationships play in undue influence cases (see here, here, here, and here, to name a few).  But does a family relationship automatically give rise to a confidential relationship?  In a recent Pearl River County probate case involving a father’s claim of undue influence by his daughter, the Mississippi Court of Appeals held that a family relationship does not necessarily equal a confidential relationship.

In 1992, Bordman Humphrey signed over two pieces of property to his daughter Jeanette Smith. His other daughter, Nadine Stevens, with whom he was living, drew up the deeds. A year later Humphrey initiated suit against Jeannette, claiming that his daughter procured the deeds to the property by fraud and undue influence. He argued that he had only intended for Jeanette to have title to the property temporarily in order to protect it from his daughter Wilda, who he believed was trying to take the property. He claimed that Jeannette was supposed to re-convey the property to him once he was mentally able to tend to his own business affairs.

The suit was drawn out for four years before Humphrey voluntarily dismissed the action against Jeannette.  But in 1999, two years after dismissing the initial suit, Humphrey was under a conservatorship and Nadine (who had originally drawn up the deeds) was the appointed conservator.  While under the conservatorship, Humphrey refiled his suit against his daughter to get his property back. By this time, Jeannette had sold the property.  Humphrey sought to recover the property both from Jeannette and the purchasers.

Because Humphrey had dismissed the suit already, the purchasers claimed that Humphrey was barred from re-instituting the lawsuit.  He claimed that the dismissal was void because he was not of sound mind when he filed it. The case was remanded to the lower court. While the case was on remand, Humphrey and Jeannette died.  Nadine continued the suit as executor of Humphrey’s estate.

The lower court held that Humphrey was not of sound mind at the time of the voluntary dismissal and set it aside.  This brought the issue of undue influence back to the forefront.  Nadine asserted that Jeannette abused their confidential relationship by exerting influence over him to coerce him into signing over the property to her. The Pearl River County probate (chancery) court disagreed, dismissing Nadine’s claims of undue influence and lack of testamentary capacity.  Nadine appealed on behalf of Humphrey’s estate.

On appeal, the issue was whether the Pearl River County chancellor erred in finding that there was no undue influence involved.  Nadine argued that the transfer was presumptively invalid because there was a confidential relationship between Humphrey and Jeannette.  But the Court of Appeals disagreed, upholding the Pearl River County chancellor’s determination that the transfer was not the product of undue influence.

The Court of Appeals  applied the well-established rule that a confidential or fiduciary relationship exists whenever there is a relationship between two people in which one person is in a position to exercise dominant influence upon the other because of the latter’s dependency on the former arising either from weakness of mind or body, or through trust.[1] But the family relationship, standing alone, does not create a confidential relationship.  While Humphrey was at times weak and dependent, he was dependent on Nadine, not Jeannette.  Although both daughters were close to their father, Nadine had the closer relationship.  And it was Nadine that had actually prepared the deeds.

Although Nadine reasserted Humphrey’s claim that the deeds were intended for safekeeping, there was nothing on the face of the deeds to support that contention.  The deeds simply contained nothing to indicate that the conveyance was anything but an outright transfer.

The Appellate court affirmed the ruling of the lower court, holding that there was no fraud or undue influence in the procurement of the deeds.

Stevens v. Smith, 2007-CA-01664-COA (March 3, 2009)

In November of 2002, Connie Eldridge and Polly Weaver filed a complaint against their sister, Deborah Steverson. The complaint Deborah had exercised undue influence over their mother in order to receive numerous inter vivos gifts and abused her position as executrix of the estate. The complaint further requested that the estate remain open until a full accounting could be filed.

Deborah filed her accounting of her mother’s estate in December of 2002, and Connie and Polly objected to disbursements.  The transactions that were contested by Connie and Polly include:  (1) $48,338.20 to pay off Deborah’s mortgage; (2) three $20,000 gifts transferred to Deborah dated April 2001, June 2001, and January 2002; (3) several cash withdrawals between December 2000 and January 2002, totaling $4,330 from an account bearing their mother and Deborah’s names with no known purpose; and (4) two transfers totaling $7,700, to Deborah’s personal account in December 2002 as reimbursements for their mother’s funeral expenses. The Madison County Chancery Court denied the objections to the accounting and Connie and Polly’s contest of the estate.

On appeal, Connie and Polly claimed that the Madison County Chancery Court did not apply the correct standard in determining whether the transactions were the product of undue influence.  The sisters acknowledge that Deborah had a fiduciary and confidential relationship with their mother. Connie and Polly argued that the contested transactions violated that confidential relationship Deborah had with their mother.  As such, the gifts should have been presumptively invalid.

The Mississippi Court of Appeals reviewed the Madison County probate decision to see if it was clearly erroneous.  The court restated the established law that, in order to overcome the presumption of undue influence, the parties must show the following:

1. Good faith on the part of the grantee/beneficiary;
2. The grantor’s/testator’s full knowledge and deliberation of [her] actions and their consequences; and
3. Independent consent and action by the grantor/testator. [2]

The court then applied each of these factors to the case.

Good Faith

The court laid out five factors to address when examining whether the grantee/beneficiary acted in good faith:

1. The determination of the identity of the initiating party in seeking preparation of the instrument;
2. The place of the execution of the instrument and in whose presence;
3. What consideration and fee were paid, if any;
4. By whom paid; and
5. The secrecy or openness given the execution of an instrument. [3]

To prove that Deborah acted in good faith in regard to the inter vivos gifts from her mother, Deborah showed that the money used to pay off her mortgage was actually her mother purchasing Deborah’s home to use as an investment property. Other family members corroborated these facts and stated that her mother wanted to make it an income property for which she could get monthly rent. Deborah was given permission to withdraw the money from their joint account to pay off the first and second mortgage.

Deborah also showed that her mother contacted their family attorney as well as an independent attorney before proceeding with the home purchase. The transaction was done in full knowledge of the rest of the family, including Connie and Polly.

The three $20,000 gifts were also given openly and initiated by their mother. her mother declared that she wanted to give all the kids $10,000 a year from the proceeds of property she had sold. However, because of disagreements, not all the kids wanted the money.

Deborah explained the cash withdrawals as money used for her mother living expenses. Deborah had a power of attorney and took care of a lot of everyday household expenses for her mother. Other witnesses were brought in to testify to the fact that her mother liked to pay for things in cash and used cash exclusively in certain situations.

Full Knowledge and Deliberation

The court laid out four factors to address when examining whether the grantor had knowledge and deliberation of her actions and their consequences:

1. Her awareness of her total assets and their general value;
2. An understanding of the persons who would be the natural inheritors of her bounty under the laws of descent and distribution or under a prior will and how the proposed change would legally affect that prior will or natural distribution;
3. Whether non-relative beneficiaries would be excluded or included ; and
4. Knowledge of who controls [her] finances and business and by what method, and if controlled by another, how dependent is the grantor/testator on [her] and how susceptible to her influence. [4]

Deborah introduced witnesses that testified to her mother’s awareness and participation in her finances, her nieces stated that she had attempted to set up online banking so her mother could stay up to date on her balances. When distributing the $20,000 gifts all of her mother’s children testified that she was aware of how much she had left in her account and when she would be able to give them more.

Independent Consent

To overcome this last prong Deborah must show that her mother sought the advice of (a) a competent person, (b) disconnected from the grantee, and (c) devoted wholly to the grantor/testator’s interest. [5]

Deborah offered proof of independent advisors in the form of the attorneys that were consulted when her mother took possession of Deborah’s house. Her mother also consulted all of her children at one point in time when making inter vivos gifts.

Based on their analysis of these factors, the appellate court found that Deborah rebutted the presumption of undue influence by clear and convincing evidence. The court affirmed the holding of the Madison County Chancery Court.

In Re Estate of Hart v. Steverson, 2007-CA-00384-COA (Oct. 27, 2009)

[2] Wright v. Roberts, 797 So. 2d 992, 999 (¶23) (Miss. 2001).

[3] In re Estate of Holmes v. Holmes-Price, 961 So. 2d 674, 682 (¶25) (Miss. 2007).

[4] Holmes-Price, 961 So. 2d at 684 (¶39).

[5] Mullins v. Ratcliff, 515 So. 2d 1183, 1193 (Miss. 1987).

If the changes scheduled under current law aren’t confusing enough, it is widely expected that Congress will act before 2011 to “fix” the current estate tax dilemma (some of us who expected the same thing for 2010 aren’t holding our breath).  In the last few months, proposals have been introduced that would provide a permanent estate tax fix.  While each of these proposals would be preferable to the current law, there are some significant differences.

Sanders Proposal: The Responsible Estate Tax Act

In June, Senator Bernie Sanders (I-Vt.) introduced the Responsible Estate Tax Act.  The bill was co-sponsored by Tom Hardin (D-Iowa), Sheldon Whitehouse (D-R.I.), and Sherrod Brown (D-Ohio).  It would raise the exemption amount to $3.5 million ($7 million for couples).  Estates valued between $3.5 million and $10 million would be taxed at 45 percent, estates worth $10 to $50 million would be taxed at 50 percent, and estates over $50 million would be taxed at 55 percent.

The Sanders proposal would also include a billionaire’s surtax of 10 percent.  It would apply to estates exceeding $500 million ($1 billion for couples).  While this tax has caused some controversy, it would affect an insubstantial portion of the population (Forbes magazine estimates that there are only 403 billionaires in the United States).

Senator Sanders’ proposal also adopts recommendations set forth in President Obama’s 2011 budget, including a ten-year cap on grantor retained annuity trusts and curbing valuation discount techniques.  The bill would allow farmers to reduce the value of farmland by $3 million (currently capped at $1 million) for estate tax purposes.  It would also increase the maximum exclusion for conservation easements to $2 million.

Sanders proposal would make the changes retroactive to January 1, 2010, a move that would almost certainly face constitutional challenges.

Lincoln-Kyl Proposal: Amending the Small Business Lending Bill

On July 13, Senators Blanch Lincoln (D-Ark.) and Jon Kyl (R-Arz.) introduced their version of estate tax reform.  Their bill was a revamped version of their April 2009 proposal, which received broad bipartisan support.

The Lincoln-Kyl proposal would require the Senate Finance Committee to amend the Small Business Lending Bill to fix the estate tax.  It would gradually drop the maximum tax rate to 35 percent and fix the exemption amount at $5 million (phased in over a 10-year term), indexed for inflation.  Basis of property acquired from a decedent would be stepped up to fair market value at death.

The Lincoln-Kyl bill allows the estates of taxpayers who die in 2010 to choose which tax regime to apply.  Taxpayers can choose to either apply the 2010 tax regime (no estate tax but modified carryover basis) or file under the provisions of the new bill.  This option would allow taxpayers with modest estates but highly appreciated assets to take advantage of full stepped-up basis.  Taxpayers without significant appreciation in their assets or those with more substantial estates could apply the 2010 law to escape taxation.

The Lincoln-Kyl bill is more taxpayer-friendly than the versions favored by most Democrats, but it is likely to garner support from Republicans and moderate Democrats.