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An Estates & Trusts Lawyer's View of the Economic Downturn
As one might imagine, economic hard times have certain adverse consequences that ripple through the estates and trusts world. Surprisingly, however, it also presents some terrific planning opportunities.
First, the bad news. Perhaps the most affected are people pulling down their retirement. The calculation of the minimum distribution amount from IRA's or other deferred compensation plans is based on a percentage of the amount in the plan as of December 31 the previous year. December 31, 2007 looked much better than now. Consequently, people required to make a minimum distribution were forced to remove an amount from tax-sheltered status that is disproportionately large as compared to what is actually in their plan by the end of 2008. The Senate Finance Committee has suggested a moratorium on required withdrawals but this will only take effect for 2009. See the Worker, Retiree and Employee Recovery Act of 2008. Others have pressed the Treasury to modify the rule for 2008, but to no avail.
A similar ripple effect is impacting charities but one that may shrink the ability to make distributions from the charity to benefit the community. Public charities are often funded by endowments. These funds provide that a core amount is to be held by the charity using income and growth from that core investment to fund the purposes of the public charity. As a result of legislation passed in the 1970's, unless a donor specifically provides otherwise, endowment funds are required to only hold the "historic dollar value" with all income and capital appreciation available to the charity for its purposes. See, for example, the Maryland Uniform Management of Institutional Funds Act. In good times this presents no problem. When the market falls, however, it means that the charity either must renegotiate the deeds of gift or use operating funds to prop up the endowment.
Perhaps the most profound impact of the economic downturn is the reduction of one's net worth. It is a very mixed blessing that this produces a corresponding reduction in exposure to the federal (and state) estate tax. Whether this change can mean a simplification of estate planning depends on one's view of the permanency of this decline and whether the planning is solely for transfer tax avoidance. We hope, of course, that the loss of value will be transitory. Also, many engage in estate planning for reasons beyond pure tax avoidance motivation—for asset protection planning, to make arrangements for heirs who may not be prepared to manage wealth, for example, so whether the economic downturn will fundamentally change one's approach to estate planning is problematic.
Assuming the downturn is temporary, there are some great estate tax planning opportunities—mostly involving gifting. Tax motivated gifting generally assumes a rising market. This is true for outright gifts, gifts of family entities (partnerships or LLCs) or gifts via GRATS. If one assumes we are experiencing historic lows in value, then this is the time for sophisticated gift planning. |
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Spousal Election Redux: Back to the Future
For hundreds of years, the law of spousal elections was fairly settled in Maryland.
Technically, the spousal election is only against the probate estate. When spouses wanted to avoid their obligation, they often made a non-probate transfer. The backstop to this maneuver was a postmortem suit based on a fraud against the spousal elective share. Various factors were examined to determine whether the non-probate transfer was a bona fide transfer or one that merely was being used to avoid the spousal rights. The test to determine this issue was based on facts and circumstances as famously articulated in Whittington v. Whittington, 205 Md. 1, 106A 2d 72 (1954). One of the factors was the degree of control that the decedent held over the transferred property.
In 1990, the Court of Appeals seemed to set forth a new standard—one focused exclusively on whether the dominion and control over the transferred assets was total. Knell v. Price, 318 Md. 501, 569A 2d 636 (1990). Since the Knell decision, it became an article of faith in the Maryland estate planning community that control was a "super" factor that indicated a fraud.
Now, the Court of Appeals has again spoken. In Karsenty v. Schoukroun, _____ Md. ___, (2008), the Court tells us that "Knell added nothing new to the analytical paradigm." In other words, the Whittington standard is alive and well. Interestingly, the Court in Schoukroun did not overturn Knell. Rather, it tells us that the facts in Knell are radically different than the facts in Schoukroun. This is a little tough to follow because the facts in Knell involved a life estate deed with a retained power to alienate while the Schoukroun case involved a revocable trust with, of course, the power to revoke. Schoukroun also involved an IRA where the ability to change to beneficiary designation is retained by the holder of the account.
It would appear that the law of Maryland regarding spousal election is the same as it was before the Knell decision except for situations exactly like Knell. Practitioners would have been better served if the Court overruled Knell. |
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Obama and Estate Taxes
As we all know, this past election became focused primarily on the economy. Both candidates discussed their tax plans—although these plans were a little tough to actually follow (truth be known). Most of the discussion had to do with income taxes and not the estate tax.
On his campaign website, Mr. Obama stated the following:
"Estate Tax: The estate tax would be effectively repealed for 99.7 percent of estates. For the remaining 0.3% of estates over $7 million per couple, Obama will retain a rate of 45%. This policy would cut the number of estates covered by the tax by 84 percent relative to 2000."
Thus, it appears that Mr. Obama is suggesting "freezing" the 2009 treatment for estates as it would have been phased in under the 2001 tax act. Under this scenario, each individual would have an exemption equivalent of $3.5 million with a flat federal rate of 45% over this rate.
With all of the issues concerning Americans during the campaign season, the fate of the federal estate tax took a fairly low priority. The actual parameters of estate tax "reform" under a Democratic president with a Democratic Congress remains, by and large, uncertain.
Mr. Obama, in the same discussion of his "comprehensive tax plan", stated that "he will also support pay-as-you-go budget rules." This supposedly means that the budget must "balance" over the cycle term (usually ten years). Even before the current financial meltdown, we were looking at large budget deficits. Mr. Obama arrives at the starting gate with large federal deficits, the economic meltdown decreasing the tax revenues, increasing federal financial participation in keeping the economy afloat, and a Congress hungry to implement its programs after years of butting heads with President Bush. Mr. Obama, of course, ran on his own platform of programs that he would like to implement. As another Illinois Senator (Dirksen, not Lincoln) once famously said: "A billion here, a billion there, and pretty soon you're talking about real money." Somewhere the real money will need to be found. My guess is that the estate tax may be either frozen at the 2009 levels or under rules less generous. |
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