Estate Planning Update – Spring 2013

At the beginning of the year, as a part of the deal to address the so-called “fiscal cliff,” Congress and the President made changes to the federal estate tax (aka “death tax”), including:

  •  the exemption amount of $5M (indexed for inflation) was extended indefinitely;
  •  the estate tax rate was changed to 40% (vs. 35% in 2012 / 55% scheduled for 2013);
  •  “portability” (allowing a surviving spouse to use a predeceased spouse’s unused exemption amount) was extended indefinitely.

While these changes are often described as “permanent,” they can be changed at any time by new legislation. In fact, President Obama’s recent budget proposal calls for lowering the exemption amount to $3.5M (not indexed for inflation) and raising the tax rate to 45%, as well as restricting the use of certain sophisticated estate tax planning techniques.

The new law represents good news for taxpayers, especially those with estates under $5.25M. These estates will not be subject to federal estate tax. Those with estate plans put in place when exemption amount was expected to be lower have the opportunity to revisit and possibly simplify those plans. Of course, they and their advisors must still be cognizant of other critical tax issues. For example, many states have state-level estate tax regimes with lower exemption amounts (e.g., Maryland and the District of Columbia), which may also apply even to nonresidents who own property in those jurisdictions. Similarly, couples where one spouse is a non-citizen face special challenges including a much lower exemption under federal law. Finally, there are income tax consequences for qualified investment accounts, such as 401k’s and IRAs, that should be considered.

Those with higher net worth will obviously need to continue to engage in estate tax planning. While “portability” can allow a married couple to transfer over $10M in assets free of federal estate tax, there are potential drawbacks versus traditional “bypass trust” (aka “credit shelter trust”) planning. Importantly, “portability” may not be available if an estate tax return is not filed upon the death of the first spouse or if the surviving spouse remarries. Rather than relying on “portability” alone, a better approach for many clients may be a plan that allows for flexibility between several different options, permitting family members and advisors to adapt to the particular circumstances that may obtain in the future – and, thus, to take advantage of the most favorable or desirable treatment.

Finally, there are many important reasons besides estate taxes to establish a well-thought-out estate plan – from providing for and protecting children and grandchildren to creating a charitable legacy. Whatever their motivations, individuals and families should seek legal counsel to assist in developing and implementing an estate plan tailored to their specific needs and desires.

New Revisions to Virginia Trust Law Allow for Asset Protection Trusts

As of July 1, 2012, revisions to Virginia state trust law now permit the use of Asset Protection Trusts, otherwise known as Self-Settled Spendthrift Trusts (SSST). A Spendthrift Trust is a trust created with an additional clause that seeks to restrict the ability of the beneficiary’s creditors from reaching the trust assets. When the Settlor (creator) of the trust is also the Beneficiary of the Trust as well as the Trustee of the trust, it is deemed to be Self-Settled. By becoming the 13th state to allow for Asset Protection Trusts, Virginia has codified the ability of an individual to create a trust that makes them the beneficiary and trustee of a Trust while also protecting those assets from their creditors. This is a policy shift in Virginia, as previously, Virginia only upheld those Spendthrift Trusts which were not self-settled.

There are specific requirements which must be met when creating such an SSST. It is important to note that an SSST will not protect assets if it is determined to be fraudulent: the asset transfer to the trust must not render the transferor insolvent and it must not hinder or defraud creditors. Therefore, persons are well-advised to consider (or seek counsel regarding) whether an Asset Protection Trust would be beneficial to their own estate planning design.

Virginia Small Estates Act Amended

The Virginia General Assembly made amendments (effective July 1, 2010) to the Small Estates Act, which provides streamlined procedures for the handling of smaller estates.  Importantly, probate estates valued at $50,000 or less (not including real estate) may be able to be distributed without the appointment of a personal representative (executor) and without going through the formal probate process.  The 2010 amendments added the defined term “small asset” – meaning any asset (other than real property) belonging to or presently distributable to the decedent valued at no more than $50,000.  A small asset must be delivered by any person holding it to a designated successor upon the presentation of an affidavit meeting certain requirements.  For small assets worth $15,000 or less, no affidavit is required, as long as a few conditions are met.

In many cases, the Small Estate Act provides a more efficient mechanism for wrapping up the estate of a deceased person.  Note that the technical legal definition of a “probate asset” for purposes of determining the size of an estate under the Act is not the same as a common sense understanding of someone’s estate.  For this reason, the Small Estate Act may be applicable in circumstances where the total estate is far more than $50,000 – for example, where most assets are held jointly with right of survivorship or held in a trust.  Heirs, beneficiaries, and persons named as executors are well-advised to consider (or seek counsel regarding) whether the Small Estate Act procedures are applicable, because there is great potential for saving time and expense.

Uniform Power of Attorney Act Goes Into Effect in Virginia

In Virginia, on July 1, 2010, the Uniform Power of Attorney Act (UPOAA) went into effect. The UPOAA changes and codifies the rules and requirements governing powers of attorney in Virginia and is intended to be uniform among the states. Approximately eight states have passed the UPOAA thus far.

The UPOAA contains a host of provisions governing the drafting and interpretation of powers of attorney. For example, unless otherwise stated, a power of attorney is presumed to be durable (meaning that it remains in effect even if the person granting the power becomes incapacitated) and non-springing (meaning that it goes into effect immediately, rather than upon some later occurrence). While most powers of attorney executed before the adoption of the UPOAA will likely continue to operate as intended, the Act does apply to powers of attorney executed before its enactment. If you have any concern about a power of attorney, please contact an estate planning attorney for guidance.

Perhaps the most important part of the UPOAA is a set of new rules governing the acceptance of powers of attorney by third-parties, such as financial institutions. In a nutshell, the Act seeks to promote the acceptance of powers of attorney by protecting those who rely in good faith on an acknowledged power of attorney (meaning one that purports to have been verified before a notary public or similar officer), while making one who improperly refuses to accept a valid power of attorney liable for attorney fees and costs of obtaining a court order. Certain procedures govern the acceptance of powers of attorney. For instance, the third-party must either accept a power of attorney or request certain additional documentation within seven (7) business days; and, thereafter, the third-party must accept the power of attorney within five (5) business days after receipt of the requested document. These provisions should make the acceptance of powers of attorney by third-parties more consistent – a welcome change.