Estate Wise Planning Newsletter Vol 1, No. 6, June 2005

Knowledge promotes understanding . . . understanding breeds creativity. . . .

ESTATE WISE PLANNING TM

Since 1979

By: Doug H. Moy

Consulting Specialist in Estate and Gift Taxation and Planning
Member, National Association of Tax Professionals (NATP)
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Published by: Doug H. Moy, Inc., P.O. Box 254, Lake Oswego, OR 97034
(503) 636-5855
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Vol. I, No. 6. June 2005
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Estate Planning Investment: An estate is comprised of myriad assets, not the least valuable of which may be the estate owner’s home. Frequently, I am asked, "How much will it cost me to plan my estate?" Regardless of the estate owner’s estate planning objectives and goals, estate planning fees should be viewed as an investment—not a cost. In the words of the world’s greatest life insurance salesman, the late Ben Feldman, "Your estate represents a lifetime...your lifetime. If it was worth spending a lifetime to accumulate, it must be worth keeping. You didn’t build it for the tax collector." [Andrew H. Thompson, The Feldman Method: The Words and Working Philosophy of the World’s Greatest Insurance Salesman, Farnsworth Publishing Company, Inc., Lynbrook, New York, 1973, 163] Taxes are not the only cost of transferring one’s estate to others. Too often we associate transfer costs with taxes when we should also consider the cost of lifetime court-supervised conservatorship proceedings and the transfer costs associated with selling a home.

Phantom Property: Phantom property is property the value of which is includable in the gross estate; yet, the property itself may not pass to the decedent’s heirs or beneficiaries. The most common examples of phantom property are property owned as joint tenants with right of survivorship (JTWROS) and real property subject to a mortgage where the mortgage is satisfied with mortgage-cancellation life insurance paid to the lender–not to the decedent’s surviving spouse or other beneficiaries. Regarding property owned as JTWROS, consider the following: Dad, Mom and their two adult children own a street-name brokerage account as JTWROS. Upon Dad’s decease first, the account will "pass" by right of survivorship to Mom and the two adult children. One-hundred percent of the fair market value of the account is includable in Dad’s gross estate as of his date of death, or the alternate valuation date. Dad’s estate is denied the estate tax marital deduction for the one-third share of the account passing to Mom (his wife) because it is a terminable interest. It would be a terminable interest since the two adult children could defeat Mom’s interest in the account by making withdrawals or by terminating the account. Dad’s estate tax exemption amount is reduced by an amount equal to two-thirds of the account passing to his adult children, thereby, reducing his available estate tax exemption amount to fund a credit shelter trust for his wife. With respect to titling the account as JTWROS, 100 percent of the fair market value of the account is includable in the gross estate of the first co-tenant to die, except to the extent that the other co-tenants can prove contribution to the initial acquisition of the securities composing the account (i.e., the consideration furnished test). The same result would occur if Dad had named his wife and his two adult children to receive the account payable on death (POD) or transferable on death (TOD).

Regarding mortgage-cancellation life insurance: phantom property is created when the lender is the beneficiary of the life insurance. In such case, the value of the life insurance proceeds is includable in the decedent insured’s gross estate; the fair market value of the real property is also included in the value of the decedent’s gross estate; no deduction for the mortgage is allowed the decedent’s gross estate, since the mortgage has been satisfied; and the beneficiary(ies) of the decedent’s estate are not entitled to the continuing mortgage interest income tax deduction, since the mortgage has been satisfied.

FDIC and Revocable Trust Accounts: Bank funds owned by the trustee of a formal revocable living trust are insured by the federal deposit insurance corporation up to $100,000 per named qualifying beneficiary of the trust separately from any other accounts of the trustee or the beneficiaries. A qualifying beneficiary(ies) means the trustor’s spouse, child(ren), grandchild(ren), parent(s), brother(s) or sister(s). For example, Jack is the owner (trustor) of a revocable living trust account with a deposit balance of $300,000. The trust provides that, upon Jack’s decease, his wife will receive $100,000 and each of their two children will receive $100,000—but only if the children graduate from college by age twenty-four. Assuming Jack has no other revocable trust accounts at the same depository institution, the coverage on Jack’s revocable living trust account would be $300,000. The trust names three qualifying beneficiaries. Coverage would be provided up to $100,000 per qualifying beneficiary, regardless of any contingencies as to when and how the beneficiaries are to receive their shares of the trust estate. Further, assume a revocable living trust has an account with a deposit balance of $200,000. The trust provides that, upon the trustor’s death, the trustor’s husband is to receive the $200,000 but, if the husband predeceases the trustor, each of their two children will receive $100,000. Assuming the trustor has no other revocable trust accounts at the same depository institution, and the trustor’s husband is alive at the time of the institution’s failure, the coverage on the trustor’s revocable living trust account would be $100,000. This is because the trust names only one beneficiary (trustor’s husband) who would become the owner of the trust assets upon the trustor’s death. If, when the institution fails, the husband has predeceased the trustor, then, the account would be insured to $200,000 because the two children would be entitled to the trust assets upon the trustor’s decease. If the revocable living trust provides for a life estate for designated beneficiaries [e.g., QTIP Trust, qualified domestic trust (QDOT), credit shelter trust] and a remainder interest for other beneficiaries, unless otherwise indicated in the trust, each life estate holder and each remainderman will be deemed to have equal interests in the trust assets for FDIC purposes. Coverage will then be provided up to $100,000 per qualifying beneficiary.

For a depositor to qualify for the revocable living trust account coverage, the title of the account must be in the name of the trustee of a written revocable living trust (i.e., a "formal" trust agreement). The account records of the depository institution are not required to identify the beneficiaries of the revocable living trust and their ownership interests in the trust.

Estate Tax Repeal Update: S. 988, Jobs Protection and Estate Tax Reform Act of 2005 (JPETRA ’05), was introduced in the Senate May 10, 2005. The federal estate and generation-skipping transfer taxes would be repealed effective for estates of decedents dying, and generation-skipping transfers, after December 31, 2004. If this bill becomes law, the following rules would apply: (1) step-up (step-down) in basis would be replaced by modified carry-over basis effective for estates of decedent’s dying after December 31, 2004. In this regard, the basis of the person acquiring property from a decedent will be the lesser of the adjusted basis of the decedent or the fair market value of the property at the date of the decedent’s death; (2) the maximum federal gift tax rate would be 35 percent for gifts made after December 31, 2004. The lifetime federal gift tax exemption amount would be $1.0 million for gifts made after December 31, 2004; and (3) a lifetime transfer (i.e., a gift) of property in trust after December 31, 2004, would be treated as a taxable gift under IRC Section 2503, unless the trust is treated as a grantor trust owned by the donor or the donor’s spouse under the grantor trust rules (IRC Sections 671-679). This means that a gift to a charitable remainder trust established by the donor during lifetime would be subject to federal gift tax. The prospects of the federal estate and generation-skipping transfer taxes being repealed in the 1st Session of the 109th Congress are uncertain and are, in my view, slim and none; and "Slim" just left town!

Nonresident Alien Estate Tax Exemption Amount: A nonresident alien is a person who is not a U.S. citizen not a resident of the U.S. Only property of a nonresident alien situated in the United States is subject to the federal estate tax. A unified credit of only $13,000 is allowed against a nonresident alien’s U.S. estate tax on property situated in the United States. This unified credit amount exempts the first $60,000 in value of the nonresident alien’s estate from federal estate tax. If the nonresident alien’s estate includes worldwide assets, then, the nonresident alien’s estate is entitled to a unified credit of that proportion of $46,800 which is attributable to the value of assets situated in the U.S. at the time of death which bears to the value of the decedent’s entire gross estate wherever situated. The value of real property acquired by nonresident aliens in the U.S. is subject to federal estate tax. Federal estate tax can be avoided on the value of such property if legal title to the property is in the name of a foreign corporation. However, if the property has already been purchased in the name of the nonresident alien and has appreciated after the purchase, a post-acquisition transfer of such property to a foreign corporation will not be protected from gain. This dilemma can be overcome by transferring the appreciated property to a U.S. corporation and, then, transferring the stock in the U.S. corporation to a foreign corporation. A sufficient amount of time should elapse before the transfer to the foreign corporation [Andrew M. Curtis, "Real Estate Offers Many Planning Opportunities," 19 Estate Planning 30, 35-36 (January/February 1992)].

Copyright 2005 by Doug H. Moy. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the author and copyright holder of this material. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor Doug H. Moy, Inc. and/or employees is/are engaged in rendering legal or accounting services. If legal advice or accounting assistance is required, the services of a competent professional should be sought.